The major U.S. indices remain in pullback mode, as many growth and technology names have suffered substantial drawdowns from their summer peaks. The truth is that these types of corrections are normal and necessary, particularly after such a strong start to the year. Instead of riding these more aggressive names all the way down in the hopes of a reversal, it’s a much better idea to identify the leaders in the current market environment.
When markets top out in the short-term and enter either a correction or more significant (bear market) decline, three out of four stocks tend to follow the market’s overall trend and will also drop in price. Moreover, growth names can drop three or even four times as much as the major market indices, and some of them may never recover. Paying attention to the overall direction of the market along with trend reversals can give us a sense of what the future may bring.
Still, there’s always a bull market somewhere, right? It's no secret that energy has been one of the leaders during this market pullback. But where else can we look?
That’s where our different ranking systems come in. We want to target stocks that are witnessing positive earnings estimate revisions, identified with the help of our proprietary Zacks Rank. We can also further narrow down the playing field by targeting leading industry groups. Let’s take a look at a leading stock that is ranked favorably and is a component of a top-rated industry.
Health-Focused Grocer Hits 52-Week High
Sprouts Farmers Market (
SFM Quick Quote SFM - Free Report) provides natural and organic food products primarily in the United States. The company offers fresh produce, meats, seafood, dairy, cheeses, vitamins, and other supplements. Phoenix-based SFM operates about 400 stores in 23 states.
The organic grocer is positioning itself for further growth ahead, with plans to open 30 new stores in 2023. SFM has invested heavily to improve operational efficiencies, highlighted by its Fresh Item Management Technology which deploys computer-assisted ordering methods.
Sprouts Farmers Market is part of the Zacks Foods – Natural Foods Products industry group, which currently ranks in the top 7% out of approximately 250 industry groups. Because it is ranked in the top half of all Zacks Ranked Industries, we expect this group to outperform the market over the next 3 to 6 months.
Historical research studies suggest that approximately half of a stock’s price appreciation is due to its industry grouping. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. By focusing on leading stocks within the top 50% of Zacks Ranked Industries, we can dramatically improve our stock-picking success.
Image Source: StockCharts
SFM stock has advanced nearly 50% in the past year, widely outperforming the major indices. Only stocks that are in extremely powerful uptrends are able to witness this type of price move. SFM shares have been hitting a series of 52-week highs throughout September, even as the general market has pulled back.
Earnings Estimates and Improving Outlook
Sprouts Farmers Market has exceeded earnings estimates in each of the past four quarters. The natural foods retailer maintained its surprise streak in August when it reported Q2 EPS of $0.71/share, a 10.94% surprise over consensus estimates. SFM has delivered a trailing four-quarter average earnings surprise of 14.26%.
Analysts covering SFM have increased their EPS estimates for the current year by 2.61% in the past 60 days. The 2023 Zacks Consensus EPS Estimate now stands at $2.75/share, reflecting potential growth of 15.06% relative to last year. Revenues are projected to increase 5.68% to $6.77 billion.
Image Source: Zacks Investment Research Bottom Line
Our Zacks Style Scores indicate a bright future for SFM stock, as the company boasts a top mark in our Value category as well as an overall ‘A’ VGM score. The promising combination of favorable value, growth, and momentum metrics bodes well for SFM shareholders.
This healthy grocer is witnessing positive earnings estimate revisions, as growth is set to continue in the quarters ahead. Make sure to put the various Zacks systems to good use to uncover leading stocks like SFM as we head into the fourth quarter.