2 Stocks to Buy Now Before Earnings for Big Growth Upside
Zacks Investment Research | Jun 21, 2021 07:12AM ET
Second quarter earnings season unofficially kicks off in mid-July with the big banks such as JPMorgan FDX , and other giants due out this week.
Stocks climbed to start the week of June 21, with the S&P 500 up 1.4% and the Nasdaq 0.80% higher on the day. The Dow also surged 1.8% Monday to bounce back from its worst week since the end of October. Wall Street sold stocks last week after the Fed signaled that they expect to lift interest rates sooner than previously anticipated.
Monday’s comeback came a week after investors pushed the tech-heavy Nasdaq to fresh records for the first time since late April. The benchmark index also hit new highs last week and investors might continue to push stocks higher.
The Fed has signaled it likely won’t raise rates until 2023 and even when they do rates will remain historically low, forcing Wall Street to keep chasing returns in equities. Plus, the continually improving earnings picture, coupled with the grand U.S. economic reopening might keep the bullish sentiment alive much longer, despite legitimate overheating and inflation fears (also read: Making Sense of Q2 Earnings Season Expectations ).
With this in mind, let’s dive into two companies that are set to report their earnings results this week to see if either stock is worth buying…
Darden Restaurants (NYSE:DRI) DRI
Darden is a dine-in restaurant chain standout, with brands from Olive Garden and LongHorn Steakhouse to Yard House and The Capital Grille. The company’s portfolio includes over 1,800 restaurants and it continues to expand. The sit-down dining powerhouse was hit far worse than the likes of Chipotle CMG and other eateries more custom to take-out, with DRI’s revenue down big over the last four quarters.
Luckily, Darden’s outlook calls for a return to growth and its positive guidance helped DRI climb to new highs after its Q3 release in late March. And the U.S. economic reopening is set to help the Olive Garden owner rebound in a big way as people clamor to return to their pre-pandemic lives. Darden’s consensus earnings outlook has soared since its last report, including some strong positive revisions leading up to its Q4 FY21 release on Thursday, June 24.
Zacks estimates call for Darden to swing from an adjusted loss of -$1.24 all the way to +$1.80 per share, while its Q4 revenue is projected to skyrocket 72%. DRI’s FY21 sales are still expected to dip 9%, even though its adjusted earnings are expected to jump 30%. But Wall Street is looking ahead to better days.
DRI’s FY22 revenue is projected to soar 30% to reach $9.23 billion. This would mark by far its largest growth as a public firm—went public in the mid-1990s—and see it climb above its pre-pandemic levels of $8.5 billion. This top-line expansion is projected to boost its adjusted FY22 EPS by 75%.
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DRI, which lands a Zacks Rank #3 (Hold) at the moment, boasts a strong history of quarterly earnings beats. The stock also grabs “B” grades for Growth and Value in our Style Scores system and an “A” for Momentum, and 15 of the 21 brokerage recommendations Zacks has are either “Strong Buys” or “Buys,” with none below a “Hold.” On top of that, DRI raised its dividend last quarter and it authorized a new $500 million repurchase program.
Despite the rough operating conditions in 2020, DRI shares soared off the virus lows. Darden is up 90% in the trailing 12 months to roughly triple its industry that includes Domino's MCD , and others. And the stock has cooled off a bit to offer a more enticing entry point, closing regular trading Monday 11% below its highs at $133.50 a share.
The recent pullback has DRI sitting below neutral RSI levels (50) at 42, providing plenty of potential post-earnings runway. And Darden trades at a 35% discount to its industry at 18.1X forward 12-month earnings, which also marks a 20% discount to its own year-long median.
KB Home (NYSE:KBH) KBH
KB Home is set to release its second quarter FY21 results on Wednesday, June 23. The homebuilder operates in 45 markets in eight different states, mostly in highly desirable areas such as Colorado, Arizona, Texas, California, Nevada, and Washington.
The company allows buyers to customize many aspects of their homes. KBH is also committed to more energy-efficient offerings. In fact, the firm boasts that it is “the first builder to make every home we build ENERGY STAR certified.”
The Los Angeles-based firm has benefitted from the booming housing market that saw U.S. home sales hit their highest levels since 2006 in 2020. KBH and other U.S. builders are poised to grow going forward within a tight housing market that is, based on one report, 5.5 million units below necessary levels. And home sales are finally being driven by millennials, which is great for KBH since a majority of its clients are first-time buyers.
KB Home is coming off a strong start to FY21, with sales up 6%. More importantly, its backlog value soared 74%. Zacks estimates now call for KB Home’s Q2 revenue to skyrocket 61% to help lift its adjusted earnings by 135% against an easy-to-compare period last year.
Peeking further ahead, KB’s revenue is projected to soar 45% to hit $6.1 billion in FY21 to blow away its pre-pandemic total of $4.6 billion. The company’s FY22 sales are then expected to climb another 15%. Meanwhile, the homebuilder’s adjusted EPS figures are projected to climb by 82% and 17%, respectively during this stretch.
KB Home’s positive earnings revisions help it grab a Zacks Rank #2 (Buy) right now and it has crushed our bottom-line estimates in the trailing three quarters. The stock closed regular trading Monday at around $43 a share to put it about 15% below its May highs.
Despite the pullback, KBH is still up 30% in 2021 to double its Home Builders industry that is in the top 3% of our over 250 Zacks industries and includes Lennar DHI , and other highly-ranked Zacks stocks.
Taking a step back, the stock has easily outpaced its peers in the past five years, up 205% vs. 130%. This makes its S&P 500-topping 1.4% dividend yield even more impressive. KBH also trades 15% below its industry at 6.8X forward earnings, which represents 20% value against its own year-long median.
The pullback has KBH trading well under neutral RSI levels (50) at 41 heading into its Q2 release on Wednesday. All that said, investors might want to consider KB Home stock as millennials drive the housing market and people take advantage of mortgage rates that are still historically low.
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