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Bull of the Day: United Natural Foods (UNFI)

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United Natural Foods (UNFI - Free Report)  is a Zacks Rank #1 (Strong Buy) that is a leading distributer of natural, organic, and specialty food. The company had been left for dead earlier in the year, but strong consumer demand by the response to COVID-19 has helped the company and the stock. With more people in the grocery stores, more product is being moved, which is a big plus for a distributor like Untied Natural Foods.

Traders have been buying the stock in hopes the recent momentum will continue, putting shares up over 100% on the year. Now, the stock has settled under the $20, but some bulls are eyeing 2018 levels of $40.

Earnings and COVID-19

On May 12th, the company reported large earnings beat and announced that it had substantially reduced its long-term debt. This news sent the stock up almost 100% in a few days.

The company reported preliminary Q3 numbers of $1.40 v the $0.46 expected and saw revenues beat expectations. The quarter will see an expected 12% revenue growth for Q3. Moreover, the company lifted its FY20 forecasts.

The stock was trading at $12, but surged to $23.45 after the news came out. This move of almost 100% was attributed to the improvement in the debt situation, but it was magnified by a lot of short sellers that were taken to the cleaners. Almost 28% of the float was short before earnings, an obvious mistake in the current lockdown atmosphere.   

Solid sales from the COVID-19 tailwinds of grocery shopping allowed the quarter to happened. While this trend might not continue forever, the quarter allowed the company to deleverage and improve its financial situation.

Estimates Rising

The beat on EPS and hike in fiscal year expectations has analysts raising estimates.  Over the last 30 days, estimates for next quarter were taken to $0.43 from $0.62, or a move of 44% higher. For next year, we see analysts moved from $1.34 to $1.60 for the same time frame. This 19% move higher shows that analysts expect earnings to remain positive for the long-term.

While the stay at home lifestyle may not last forever, there looks to be positive momentum for grocery stores and their distributers over the next year.

The Technical Take

UNFI was above $40 for most of 2018. However, the stock broke that support level when it announced it would take over SuperValu in July of that year. The amount of debt that UNFI was taking on was a problem for investors. During the course of that year, the stock traded all the way down to $10, where it was stuck for most of last year.

During the COVID panic in March, the stock hit $5, but quickly bounced once investors realized the company would benefit. After the earnings outlook hit, the stock went to almost $24 a share and has since pulled half way back from highs.

The 61.8% Fibonacci level at $15.50 and the 21-day moving average at the same area should provide technical support. If this level holds, Fibonacci targets at $26 should eventually come.

If positive news can continue, longer-term holders can target $34 and even the $40 gap area.

In Summary

United Natural Foods will continue to have success even as economies reopen. Many consumers will be taking their time getting back to normal and they will stick to the grocery stores rather than restaurants. This momentum is extremely positive for UNFI and the company will continue to deleverage away from the SuperValu acquisition, which will create value for investors.

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