For Immediate Release

Chicago, IL – May 22, 2023 – Zacks Equity Research shares ServiceNow (NOW Quick QuoteNOW - Free Report) as the Bull of the Day and Lovesac (LOVE Quick QuoteLOVE - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on M.D.C. Holdings, Inc. (MDC Quick QuoteMDC - Free Report) , D.R. Horton, Inc. (DHI Quick QuoteDHI - Free Report) and Taylor Morrison Home Corp. (TMHC Quick QuoteTMHC - Free Report) .

Here is a synopsis of all five stocks.

Bull of the Day:

ServiceNow, a leading SAAS workflow company, has emerged as a highly compelling stock with robust growth, technological advancements, and strong fundamentals. With a Zacks Rank #1 (Strong Buy), a bullish technical chart pattern, and a series of strategic announcements, ServiceNow stock demonstrates potential for near, and long-term success.

ServiceNow provides cloud computing services that automate digital workflows to accelerate enterprise IT operations. The company’s Now Platform enables companies to enhance productivity by streamlining systems and automating manual and complex processes.

NOW stock has been an exceptional performer in the last 10 years. Over that period, it has compounded at an annual rate of 29.7%, far outperforming the broad market.

Fundamentals

During its most recent earnings statement ServiceNow handily exceeded expectations, reporting profit of $0.84 per share, well above analysts’ estimates of $0.47 per share. ServiceNow boasts a Zacks Rank #1 (Strong Buy) reflecting the positive trajectory of its earnings revisions. Analysts are in unanimous agreement in upgrading FY23 and FY24 earnings estimates.

NOW has been delivering strong financial results for many years. After running at a net loss for several years after IPO, it flipped net profitable in 2018, and has grown earnings from $0.17 to $2.42 per share since then. Additionally, ServiceNow is putting up 20% annual sales growth, showcasing its ability to expand its customer base and gain market share in a competitive landscape.

Technical Setup

From a technical perspective, ServiceNow exhibits a very bullish chart pattern. The stock price has shown strong momentum, and just broke out above a level of resistance. Additionally, NOW has been stair-stepping higher since the beginning of the year building higher lows and higher highs, indicating increasing demand for NOW shares. It is clear that selloffs are met with robust buying.

Share Buyback Program

ServiceNow recently announced its first share buyback program, which demonstrates management's confidence in the company's long-term prospects. Share repurchases can boost shareholder value by reducing the number of outstanding shares, potentially increasing earnings per share and signaling a commitment to returning capital to investors.

AI Initiatives

ServiceNow is at the forefront of innovation, leveraging artificial intelligence to enhance its platform and drive productivity for IT professionals worldwide. The company unveiled a new generative AI controller that connects AI tools with its platform, enabling more efficient workflows and intelligent automation.

ServiceNow announced a partnership with Nvidia to develop a specialized generative AI solution, which further solidifies its commitment to leveraging cutting-edge technology to deliver transformative solutions.

Valuation

ServiceNow commands a premium valuation at 11.8x forward sales, reflecting the market's recognition of its growth prospects and strong fundamentals. While above the market average of 3.7x, the valuation remains slightly below its 10-year median of 12.5x. This suggests that the market is pricing in the company's potential for continued growth and profitability, making ServiceNow an attractive investment opportunity.

Conclusion:

ServiceNow is being driven higher by its upward trending earnings revisions, high annual sales growth, and strong technical performance. The company's strategic initiatives, including the introduction of a share buyback program and its innovative AI advancements, underscore its commitment to technological advancement and shareholders’ interests.

Although trading at a premium valuation, ServiceNow's growth potential and solid fundamentals make it an appealing investment in the near and long term.

Bear of the Day:

Lovesac, a furniture company specializing in modular designs, faces significant challenges as reflected by its Zacks Rank #5 (Strong Sell) and downward trending earnings revisions. Despite a strong Q4 earnings report and previous sales growth, the stock continues to experience downward pressure.

Coupled with a bearish technical chart pattern and changing consumer spending patterns, Lovesac encounters a challenging landscape, warranting a bearish stance. Lovesac's stock has been stuck in a prolonged downtrend and is nearing its IPO price from five years ago.

Earnings

Earnings estimates for Lovesac have been consistently revised lower over the last year, reflecting falling expectations for the furniture retailer. Full year earnings estimates were halved over that period. Q1 earnings have been slashed from $0.03 per share to -$0.39 per share, a painful flip to net negative profitability.

Over the last few years Lovesac has grown sales at an impressive pace, regularly expanding more than 30% annually. However, those rates of growth are not expected to continue. Analysts estimate FY24 sales growth of just 8.2%, and FY25 growth of 14.3%. Even those figures may be challenging if the economy slows more than expected.

Technical Setup

Lovesac stock has been trending down for the better part of two years, with all major rallies meeting a rush of sellers. After consolidating for the last six months and building out a range, LOVE stock is breaking lower again. The bear flag indicated in the chart below identified a level of support at $23 dollars, which has been lost.

Now below the $23 level, LOVE stock may explore much lower prices. Alternatively, if the price can reverse higher immediately, and retake the level of support, it would invalidate the trade setup, although it looks rather unlikely at this point.

Falling Retail Discretionary Spending

While consumer spending on items like new furniture experienced a surge during the post-COVID boom, there is now a pullback in discretionary expenses. Encouraged by the flood of easy money, consumers spent far more than normal and likely pulled forward several years of consumer spending.

New purchases like home renovations, automobiles, televisions, computers, and furniture like that sold at LOVE are not items that are purchased regularly. As larger discretionary purchases, more akin to a big splurge. Retailers of these products are likely to experience a significant slowdown until the trough of the business cycle.  

According to the National Retail Federation “In the first calendar quarter of 2023, significant U.S. retailers announced plans to open about 2,570 new stores, down sharply from about 4,400 announced openings in last year’s first quarter. They announced plans to close about 1,760 stores, nearly three times higher than the approximately 635 store closings announced in the first quarter of 2022.”

The reality is that as the economy continues to slow down, consumer priorities shift, and uncertainties arise, reducing discretionary expenses.

Contrarianism

From its IPO to now, Lovesac has had an incredible story that equity researchers and investors have reasonably become attached to. LOVE has created a differentiated product and enjoyed incredible sales growth. However, optimistic views of the stock at this point in the business cycle is a risky prospect.

In addition to the challenges facing Lovesac, it is worth noting that many Wall Street analysts still maintain a buy rating on the stock. While consensus opinions can carry weight, it is important to recognize the potential pitfalls of herd mentality in the investment world.

When everyone is on one side of the trade, it can create an opportunity for contrarian investors to capitalize on market inefficiencies. Being a contrarian can be an effective strategy when everyone is on one side of the trade, and in this case, it looks like many investors are still bullish while economic fundamentals deteriorate.

Valuation

Lovesac is trading at a one-year forward earnings multiple of 12.5x, which is above the industry average 10.5x, and below its two-year median of 14.9x. While this is a reasonable valuation, it is still above the industry average. And with the possibility of further compression in earnings looming, it may fall further.

Conclusion

Lovesac confronts significant challenges ahead, marked by declining earnings expectations, a bearish technical chart pattern, and economic headwinds. Investors should exercise caution and closely evaluate the company's performance, and future growth prospects going forward.

Additional content:

3 Homebuilding Stocks to Buttress Your Portfolio

The longer-term factors driving the housing market should make you highly optimistic about the segment right now, even if the near-term outlook is not as exciting.

On May 10, the Conference Board stated that real GDP growth should come in at 0.7% this year, dropping to 0.4% next year. Consumer spending continues to slow as a result of inflation, while business spending continues to slow because rate hikes and labor market tightness are increasing costs for companies. Government spending, particularly on infrastructure, is a positive.

Another positive is the labor market, where the unemployment rate of 3.4% remains at historic lows. Job growth remains positive, with most of the additions in professional and business services, healthcare, leisure and hospitality, and social assistance. [BLS data]. A strong labor market means sustained consumption, as well as continued demand for housing.

Third, the Fed used encouraging language about future rate hikes, so many in the market think that May will be the last one this time round. Although the Conference Board doesn’t consider it likely, stabilization in the interest rate will be positive for businesses, including for homebuilders. As a result, mortgage rates will also stabilize, helping home buyers.

Fourth, personal income continued to increase in March by 0.3%, led by private wages and salaries, receipts on assets and an increase in personal dividend income. A 0.1% reduction in spending allowed a personal saving rate of 5.1%. Savings help you make down payments.

All of this doesn’t mean that the high inflation, high interest rates, high mortgage rates and escalating home prices aren’t having a negative impact on the market right now. Along with the rising cost of land and materials and shortage of skilled labor, which increase building costs, these factors are particularly hurting home affordability, which is telling in the data on first-time home buyers. The luxury segment is doing better than the rest.

According to Realtor.com data as reported by CNN, 15.6 million new households were formed between 2012 and 2022, and only 8.5 million single-family homes and 3.4 million multi-family units completed. This has created a huge shortage of available homes.

Additionally, the population continues to increase, with an increasing number of people starting their families every year. This further increases the gap between demand and supply. Since many people refinanced their homes in the last few years to take advantage of lower mortgage rates, they are unwilling to sell and move up because of the higher rates today. Although this is the existing home segment, it affects the overall supply in the market with a corresponding effect on prices.

It will take several years for the market imbalance to correct itself and for prices to come down. Therefore, the high demand, strong pricing environment is likely to continue, making the segment a good long-term play.

Now turning to stocks, it’s worth mentioning that analysts expect most companies to report revenue and earnings declines this year, as the high prices continue to keep some buyers out and other factors of production (discussed above) increase cost. But it’s likely to be a temporary phenomenon as the U.S. battles with a possible recession, however soft it may be. Analysts are equally optimistic that things will change next year, when growth returns:

M.D.C. Holdings, Inc.

Zacks #1 (Strong Buy)-ranked MDC is expected to report a revenue decline of 30.2% and earnings decline of 57.9% in 2023, followed by a revenue increase of 5.0% and earnings increase of 20.8% in the following year. The 2023 estimate has increased 69 cents (27.2%) in the last 30 days while the 2024 estimate increased 91 cents (30.4%), as analysts revised estimates.

D.R. Horton, Inc.

This Zacks Rank #1 stock is expected to report revenue and earnings declines of 3.6% and 33.3% this year, returning to growth with +1.1% in revenues and +6.4% earnings next year. But if recent estimate revisions are an indication of any trend, the company may ultimately generate growth this year as well: the 2023 (ending September) estimate is up $1.93 (21.3%) and the 2024 estimate is up $2.15 (22.5%) in the last 30 days.

Taylor Morrison Home Corp.

The Zacks Rank #1 stock is expected to report revenue and earnings declines of 14.4% and 27.3%, respectively. In 2024, they’re expected to grow 7.4% and 6.7%, respectively. The 2023 estimate is up 34 cents (5.3%) while the 2024 estimate is up 22 cents (3.1%) in the last 30 days.

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