An overvalued stock with negative earnings estimate revisions on its record is one that could cause trouble in any market environment, and with headwinds like trade war woes threatening broader indexes, the risk is exacerbated. Unfortunately, that risk is exactly what is present in At Home Group (HOME - Free Report) right now.
At Home Group is an owner and operator of home-décor accessories stores, primarily in the U.S. It is essentially a big-box retailer focused on furniture, home furnishing, wall décor, and various other housewares.
A strong labor market and a solid overall consumer economy should buoy companies like this to an extent, but investors have plenty of opportunities to cash in on these trends, and they’ll want to be make sure they are picking the best ones. HOME, with its Zacks Rank #5 (Strong Sell) and “F” grade in the Value section of our Style Scores system, does not look like that.
You see, At Home has actually witnessed a number of positive earnings estimate revisions recently. But it’s where the negative revisions have come in that is particularly troubling.
Indeed, within the past 60 days, At Home as witnessed four negative revisions to its earnings estimates for the quarter ending January 2019—also known as the holiday quarter. At Home should be seeing an uptick from seasonal décor sales and gift shopping during the holiday period, but if analysts don’t think that will result in stronger earnings, we may be stumbling upon a problem.
Another concern is the general sluggishness seen throughout At Home’s industry. We tend to think the strongest stocks come from the strongest industries, and it’s entirely possible that even the brightest stars in an otherwise lackluster group can struggle to generate momentum. To get a read on this, we use the Zacks Industry Rank.
The Zacks Industry Rank gauges the strength of our individual industry groups by measuring the average Zacks Rank of the individual stocks within the groups. Our research shows that the top 50% rated industries outperform the bottom half by a factor of 2 to 1.
Unfortunately, At Home’s “Retail – Home Furnishings” group is currently ranked in the Bottom 5% of the Zacks Industry Rank. There are no stocks in the industry with buy rankings, and only the #3 (Hold)-ranked Williams-Sonoma (WSM - Free Report) looks to be in an extended uptrend.
And to make matters worse, investors would be forced to pay a premium for At Home compared to this lackluster industry:
At Home is currently trading at 24.6x forward 12-month earnings. That’s a premium to the broader market, but it’s an even steeper premium compared to the average of 16.2x displayed by its industry peers.
Also contributing to At Home’s measly “F” grade for Value is its comparatively weak cash flow. The company is generating just $1.50 in cash per share, lagging its industry average by 65 cents. It also sports a P/CF ratio of nearly 23.7, which is a premium to its industry’s 10.7.
So to recap, we have a slightly overvalued stock in a sluggish industry which is witnessing negative earnings estimate revisions for the most important period of its fiscal calendar. This feels like a combination to avoid for now.
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