New S&P 500 member Onsemi (ON) and Costco Wholesale (COST), which continues to thrive as the other mega retailers struggle, lead this weekend’s stocks to watch. Engineering heavyweight KBR (KBR), Norwegian oil and gas producer Equinor (EQNR) and construction products leader Builders FirstSource (BLDR) also are near buy points.
All of these stocks have handle buy points, with Costco, KBR and Equinor, at minimum carving the classic cup-with-handle base.
The S&P 500 has now recovered well more than half its losses. Having climbed 16.7% off its June 16 closing low, the S&P 500 stands 10.8% below its June 3 record closing high. The rally has been built on a narrative that easing inflation and a moderation of growth will enable the Federal Reserve to engineer a soft landing for the economy. But that outlook is far from assured, so a degree of caution is in order.
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Onsemi and Equinor are both part of the flagship IBD 50 list. Equinor is also on the watch list of the IBD Leaderboard portfolio of elite stocks. Builders FirstSource is a recent addition of the SwingTrader portfolio.
Onsemi officially joined the S&P 500 on June 21. The chipmaker makes power control and sensing chips for EVs, advanced driver-assistance systems, energy infrastructure and factory automation. On Aug. 1, Onsemi delivered 113% second-quarter earnings growth to $1.34 per share on 25% revenue growth to $2.085 billion.
Analysts are particularly bullish about its positioning in silicon carbide chips for EVs. “Customers are able to develop systems with longer battery life (and range) using ON’s solution,” Needham analyst Rajvindra Gill wrote after the earnings beat.
In Friday stock market action, ON stock rose 7.2% to 71.16, shooting past a 68.93 buy point. The buy range runs through 72.38. However, investors can also use a 71.35 buy point, according to a MarketSmith analysis.
The relative strength line is at a new high, reflecting ON stock’s outperformance vs. the S&P 500 index.
One concern: Onsemi is more than 20% above its 50-day and 200-day moving averages.
On Aug. 3, Costco reported July sales of $16.85 billion, up 10.8% from a year ago. Excluding the impact of gas prices comparable-store sales rose 7%. If not for one fewer shopping day in the U.S., sales would have been about 2.5% higher.
At a time that Walmart (WMT) and Target (TGT) have been struggling with excess inventory as customers deal with inflationary pressures, Costco is demonstrating the benefit of its model. It’s know for competitive pricing, fast inventory turns, a higher-income customer base and a relatively low labor intensity, meaning higher revenue per employee.
COST stock rose 0.9% to 537.21 on Friday. COST has etched out a handle with a 552.81 buy point, which provides an early entry opportunity relative to its 612.27 all-time high in April.
Two notes of caution: Costco’s relative strength line, which tracks its progress vs. the S&P 500, has trended lower for the past month. Also, high-profile retail earnings in the coming week could affect sentiment in the near term.
KBR cited “favorable market tail winds” while missing second-quarter revenue estimates on Aug. 2. “Themes that favor our capabilities and technologies — national security, defense modernization, global energy security and climate change — continue to be at the forefront of priorities.”
The company is bullish on plastics recycling after expanding on its investment in Mura Technology, a U.K.-based leader in plastics recycling technology. In June, NASA selected Axiom Space, of which KBR is a major partner, as one of two companies to develop next-generation spacesuit and spacewalk systems, with up to $3.5 billion at stake through 2034.
KBR also is seen as a beneficiary of the $1 trillion infrastructure law approved, which was approved last November, but those funds are only beginning to flow out. New legislation to streamline permitting for energy infrastructure projects pushed by Joe Manchin, D.-W.Va., could provide more fuel for engineering firms such as KBR.
KBR stock climbed 2.3% to 52.73 on Friday, leaving it just below a 53.57 buy point from a cup-with-handle base.
Equinor, the state-owned Norwegian energy company, is a key supplier for Europe, no longer able to depend on Russia as a major natural gas supplier. Following a fire in September 2020, Equnior’s Hammerfest LNG facility returned to operation at the start of June, sending its first cargos to Europe.
Equinor is also expanding an $8 billion oil development project off the coast of Brazil with Exxon Mobil (XOM), among its projects in 36 countries.
On Friday, EQNR stock slipped 1% to 37.96 amid a 2.6% pullback in the crude oil price to $91.88 a barrel. On Thursday, EQNR stock had nosed above a 38.51 handle buy point.
Builders FirstSource, in its Aug. 1 quarterly earnings report, made some fairly downbeat assumptions, including a mid-single-digit percentage decline in housing starts. While some analysts have grown cautious amid macroeconomic pressures, a number see BLDR as well positioned to handle a period of housing weakness.
Sales growth has decelerated considerably over the last four quarters, from 187% to 24%. But earnings per share growth has been in the triple digits for the past seven quarters.
Baird analyst David Manthey boosted his target to 100 from 74, keeping an outperform rating.
Builders FirstSource has benefitted from its focus on value-added products, which generate higher profit margins. An example is its pre-cut Ready-Frame package to speed up home construction. That has helped builders deal with labor shortages, which drive up the cost of framing labor. Acquisitions also are expected to add 6%-7% to sales growth this year.
BLDR stock rose 0.7% to 70.75 on Friday, edging toward a 74.58 cup-with-handle buy point. Shares are modestly above their 200-day line.
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