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Bull of the Day: Tractor Supply (TSCO)

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Tractor Supply Company (TSCO - Free Report) is a Zacks Rank #1 (Strong Buy) that is the largest retail farm and ranch store chain in the United States. The Brentwood, TN company offers a variety of merchandise, including equine, livestock, pet and small animal products for health, care, growth and containment. Additionally, the company sells hardware and tools, lawn and garden power equipment, truck and towing products and work apparel. Tractor Supply employs 33,000 employees and has over 2,000 stores.

COVID-19 Drop and Pop

The March panic gave investors a great long-term buying opportunity. The stock fell almost 40% from it February levels making a low of $63.89. Since then, the stock has rallied over 100%, recently making highs near $132.

The reason for the drop was obvious, everything was falling in March. The pop was more curious at first, but now investors are realizing the dominance that Tractor Supply has in the rural markets. For that reason, they have been plowing into the stock.

Earnings Beat

Tractor Supply reported back in April when there was still a lot of fear and uncertainty in markets. However, TSCO saw a beat on EPS and reported that SSS were actually up 4.3%. Considering the COVID retail pain was mostly in the cities, the company didn’t see as much of an impact as others.

In May the company came out with a Q2 Guide that blew away the numbers.The company now sees $2.45-2.65 v the $1.77 expected. Additionally, they see SSS up 20-25%. The company said it experienced record sales across its channels, product categories and geographic regions. The e-commerce portion of its business saw substantial growth as customers ordered online and picked up at the store.

The earnings report in April took the stock above February levels and the guide helped accelerate the stock higher. With analysts raising price targets and estimates, investors can’t get enough of Tractor Supply.

Estimates Rising

Over the last 30 days, estimates for the current year have gone from $4.73 to $5.57, a move of 18%.  For next year, estimates have been taken up 6.4% higher over the same time frame.

Analyst commentary cites the niche customer base, lack of competition and store-expansion as reasons to own the stock. Piper, Wedbush, Oppenheimer, Guggenheim and UBS have all raised their price targets for the stock since the Q2 guide.  

Farmer Aid and Stimulus Checks

A big reason that the company has done so well is their quick ability to adjust to the pandemic and offer digital sales and curbside pickup. However, consumers ultimately need cash to spend and the stimulus checks were a big factor in allowing costumers to put that money to work. Additionally, the $19B farmer aid program gave farmers cash payments and bought farm products that helped the cash flow in rural America.

The Technical Take

The stock has had a run and for most chasing it at all-time highs isn’t appealing. So let’s look at some levels where a trade entry might work out over the long run.

For those looking to jump in, potential upside in the short-term is $158, which is the 261.8% Fib level from the move lower earlier in the year.

Those looking at pullbacks should look at the moving averages. The 21-day is the $123 area, 50-day is $111 and 200-day is $96. The $90-96 zone would be a great spot to get in longer-term as that marks the 61.8% area from March lows to recent highs. However, lets be honest in the fact that you might not see that.

Best long-term approach with this stock is to initiate a starter position and trade around technical support.

In Summary

Tractor Supply is in a niche market that offers customers the essentials for farming and ranch work. Giving the sales the company is seeing during the pandemic, there is no reason to think the momentum can’t continue when the economy is back in full throttle.

While the stock has pushed to levels that seem very high, there is still meat on the bone, both technically and fundamentally. With being said, investors should jump on the pullbacks for a long-term run higher.

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