5 stocks to watch next week
McDonald's, Starbucks and defense industry mainstays report earnings. December home sales likely move homebuilders. Chipotle shakes off weak pre-announcement.
1) McDonald's reports Q4 earnings
What's happening: McDonald's (MCD) shares sold off significantly in October due to weaker-than-expected third quarter results. Shares have since risen steadily. Wall Street will be paying close attention on the 23rd when the the fast food giant looks to redeem itself with fourth quarter results. Analysts forecast earnings of $1.33 per share, which would fall in-line with the same period last year.
Technical analysis: MCD was recently trading at $91.10, down $11.12 from its 12-month high and $7.79 above its 12-month low. Technical indicators for MCD are bullish and the stock is in a weak upward trend. The stock has support above $88.00 and resistance below $93.75. Of the 26 analysts who cover the stock 13 rate it a "strong buy," two rate it a "buy" and 11 rate it a "hold." The stock receives Standard & Poor's 4 STARS "Buy" ranking.
Analysts' thoughts: Based on the action following McDonald's third quarter results, we expect to see increased volatility immediately following the fourth quarter results. Wall Street has turned bullish on the stock, but it is still trading below the level it was going into the Q3 results, partly because investors fear another disappointing quarter. If the company reports better than expected numbers, MCD could quickly trade up to $100 a share, but an earnings miss or even in-line numbers could result in another selloff.
2) Starbucks also steps into the earnings confessional
What's happening: Starbucks (SBUX) stock has been in a strong upward trend since it last reported earnings on November 1. Over the past year the company has reported mixed results, with big moves coming after each earnings report. Based on the volatility following the company's last two reports we can expect to see more of the same when Starbucks reports its fiscal first quarter numbers on January 24. Analysts expect first quarter earnings of $0.57 per share, up from $0.50 during the same period last year.
Technical analysis: SBUX was recently trading at $54.35, down $7.65 from its 12-month high and $11.31 above its 12-month low. Technical indicators for SBUX are bullish and the stock is in a weak upward trend. The stock has support above $52.00 and resistance below $55.80. Of the 27 analysts who cover the stock 19 rate it a "strong buy," one rates it a "buy" and seven rate it a "hold." The stock receives Standard & Poor's 4 STARS "Buy" ranking.
Analysts' thoughts: We expect to see positive earnings from Starbucks for its first quarter. Consumer confidence has been rising and we believe that consumers are once again willing to spend a little extra for Starbucks' premium offerings. The company has a profit margin of around 10% and has been rapidly expanding in China. In addition, it is now also starting to show impressive growth figures in Vietnam. Because of its strong brand recognition in the U.S. and its rapid international growth, we believe 2013 will be a strong year for Starbucks.
3) New home sales report
What's happening: Lennar (LEN) stock has been in a solid bullish trend over the past year. The housing market is improving and all of the major homebuilders have benefited. But the housing market rebound is being held back by tight lending standards that are preventing some potential homebuyers from entering the market. As a result, there is increased demand for rental properties and Lennar has expanded its business into the rental market in order to take advantage of this trend. Rental properties are becoming a new asset class and Lennar is the first homebuilder to use rental properties as a profit center. On January 25, the Commerce Department will announce new home sales figures for December.
Technical analysis: LEN was recently trading at $40.52, down $1.48 from its 12-month high and $19.19 above its 12-month low. Technical indicators for LEN are bullish and the stock is showing signs of a possible trend reversal. The stock has support above $38.50. Of the 17 analysts who cover the stock five rate it a "strong buy," two rate it a "buy," eight rate it a "hold" and two rate it a "strong sell." The stock receives Standard & Poor's 3 STARS "Hold" ranking.
Analysts' thoughts: We do not expect anything in the December new home sales data to indicate a weakness in the housing market. We believe that the housing market will continue to improve through 2013, which should help homebuilders build on gains they enjoyed during 2012. With Lennar jumping into the rental market, it is putting itself in a good position to take advantage of a situation where both the housing market and the rental market are improving.
4) Defense industry takes center stage for earnings
What's happening: Despite the budget cuts that are scheduled to hit the defense industry, most defense stocks have held strong in recent months, including Northrop Grumman (NOC). The stock sold off a bit in early November, but other than that has been strong and has gained back most of its November losses. There are going to be several defense stocks reporting earnings during the coming week, including General Dynamics (GD), Raytheon (RTN) and Lockheed Martin (LMT). And their results will impact NOC sympathetically. NOC is scheduled to report its own fourth quarter earnings on January 30.
Technical analysis: NOC was recently trading at $68.65, down $4.40 from its 12-month high and $10.26 above its 12-month low. Technical indicators for CMG are bearish with the stock showing signs of a possible trend reversal. The stock has support above $66 and resistance below $68.75. Of the 16 analysts who cover the stock one rates it a "strong buy," 11 rate it a "hold," one rates it a "sell" and three rate it a "strong sell." The stock receives Standard & Poor's 3 STARS "Hold" ranking.
Analysts' thoughts: Unless we see major earnings disappointments from other defense stocks, we do not expect too much action in the sector over the next month. The scheduled defense cuts that were supposed to take place at the end of December have been postponed until March 1 and before acting traders will likely wait to see what steps Congress takes, if any, to stop these automatic cuts. If nothing is done, the Pentagon cuts will kick in, with $42.7 billion in cuts this year alone. Starting next year the cuts will reach $54.7 billion annually until 2021. If some sort of deal is reached, we expect the entire defense industry will rally, but if Congress and President Obama decide to allow the budget cuts to start, it could have a devastating impact on every defense stock, NOC included.
5) Chipotle Mexican Grill reacts to weak preliminary Q4 results
What's happening: Chipotle Mexican Grill (CMG) was in a steady upward trend until it disappointed analysts with weak preliminary fourth quarter results on January 15. The company will not report full earnings results until the first week of February, but it forecast fourth quarter earnings in a range of $1.92 to $1.97 per share, well below the $2.08 per share analysts had been expecting. CMG fell as much as 10% on the next day of trading before finally closing the session down 5.5%. The weaker than expected preliminary results raised fears that increased competition combined with rising food costs were starting to weigh on the restaurant chain.
Technical analysis: CMG was recently trading at $280.94, down $161.46 from its 12-month high and $47.12 above its 12-month low. Technical indicators for CMG are bullish with the stock showing signs of a possible trend reversal. The stock has support above $273. Of the 22 analysts who cover the stock five rate it a "strong buy," 15 rate it a "hold," one rates it a "sell" and one rates it a "strong sell." The stock receives Standard & Poor's 2 STARS "Sell" ranking.
Analysts' thoughts: The advantage of releasing preliminary results is that CMG was able to get its bad news out of the way before its earnings report. The stock has sold off in reaction to the lower guidance, but with the disappointing results already priced into the stock, we do not expect much more downside on the earnings date. However, if CMG disappoints even further by missing its lower guidance, then we could easily see another big drop like the one we just saw.
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At the time of writing, Mr. Fowlkes owns a long position in McDonald's but does not have direct ownership in any of the other stocks mentioned.
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US markets were able to rally hard and largely trim the day's losses. Meanwhile, a bounce in crude oil could be in the offing.
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