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Generac (Quant Hold) surged after announcing agreement with Amazon (Quant Strong Buy) (1:40) Powell in a similar situation to Generac (6:40) Growth does not look great for Kroger (Quant Hold) (9:05)

Transcript

Rena Sherbill: Hi everybody, good afternoon. For those expecting our wonderful Kim Khan today, he is off and in his stead, we bring you something new that I have been doing with our very own head of quant, Steven Cress, every morning around market open, Steve and I sit down and bring you a Wall Street breakfast of our own.

Riffing off Julie Morgan’s wonderful Wall Street Breakfast podcast, we highlight the top stocks of the day and we cover them from a quant perspective. Steve dives deep into each stock, shares why it’s a buy, a hold, or a sell, and gives some very edifying and actionable details along the way.

We also talk about that morning in the markets and basically afford yourselves an opportunity to hear from one of the really the investing greats of our time, and that’s Stephen Cress. I mean, I don’t even consider that hyperbolic.

So @CressTopStocks, that’s on YouTube, X, and TikTok, full episodes on TikTok and YouTube, coming soon, these episodes will be live on X, YouTube, and TikTok. But for now, you can catch them right after we record them at market open.

So as a little preview of what you can expect from that daily morning show, we are gonna give you a taste of that today and on Friday, as you head into the weekend. This is Steve Cress on this morning’s Wall Street Breakfast with Steven Cress. Hope you enjoy it.

Welcome back, everybody. It is Thursday, September 17th. We are here with none other than Mr. Steve Cress. Yesterday we were talking about the Fed meeting. They did indeed hike rates as expected. Steve, what are you looking at this morning?

Steven Cress: Really exciting day yesterday for traders and investors. And on the back of that twenty five basis point hike by the Fed, I can largely say that most traders expected it, especially the Bond vigilantes, the interest rate traders, roughly ninety-two percent saw the probability of rates going up twenty five basis points.

I think what was a little bit of a surprise was that forward guidance that there could be another twenty five basis point hike. So initially the expectation was and from history when a hike does take place, the market actually trades up on the day of the hike.

And it was trading up, but when that commentary came out from the Fed chair that there could be possibly another twenty five basis point hike, that projection from the dot plot.

I don’t think there was the anticipation that there could be another twenty-five basis point hike, and they clearly indicated that yesterday.

So the market rolled over a little bit, but the good news coming out of that rollover yesterday was that many of the stocks that had been hit hard starting in May and June, which were typically AI stocks, semiconductor stocks, industrial stocks that benefited from AI, have basically been trout from June to recent days.

There’s also an important announcement today that came out from Jenarack that kind of confirmations the existing demand for the sector. So I am gonna highlight Generac (GNRC) the stock today because it is up significantly.

Rena Sherbill: I saw that it was up over 30% pre-market after well, I I’ll just say after it announced a long-term supply agreement with Amazon (AMZN) that includes 2.4 billion of initial of initial generator deliveries in 2027 and 2028 for Amazon’s data centers.

Steven Cress: And that is huge. to the extent in the pre-market here. we’re minutes away from the opening, but in the pre-market, the stock is up 32%. so I think there’s really two things that are going on. One, we I will say we did have a quant hold on this stock. Looked like the hold wasfairly good.

As I mentioned, a lot of the stocks that focus around data centers and AI got trounced and Generac is not the exception. You can see back in June that the stock was up at 274 and it fell all the way to 175. But this order from Amazon indicates that these companies are live and well.

And yesterday I kind of felt like many of the stocks within the AI trade were bottoming out. So even with the Fed hiking rates by 25 basis points. And the likelihood that there could even be one or two more rate hikes. it may mean that the overall market is softer than expected.

But with these particular stocks that are in the AI trade, they sort of had valuation compression take place already. And as we go into the upcoming quarters, we see that orders and earnings and revenue continue to look good. This could be a really good time to look at companies like Generac.

So Generac, we did have a hold on. Analyst revisions are a B plus. I would imagine in the next day or so that revision grade will change. the growth for the company flattened out. That was one of the reasons for the C. And when I click on that, you can see the year-over-year numbers don’t look great for Generac, but some of the board numbers already look good.

And I think that’s actually gonna improve. So it has not been a strong stock since June. the fate of this may change on the back of that announcement from Amazon, but also the valuation compression as well. let’s take a look at Amazon, where we do have the strong buy. obviously, them being the provider of that order, that stock is up 1.9% in the free market after being off about 1% yesterday, which is really in line with the NASDAQ. So we maintain our strong buy on Amazon.

Now I will say, based on that announcement, I believe there are number of other companies that have gotten hit hard that I want to highlight that should perform well, sort of as we hit this capitulation phase. and we’re entering into a period where there’s validation that business is still well alive.

So I’m gonna share with you a stock called Powell (POWL). And similar to Generac, if you take a look at this, since June, the stock has gotten hammered. Back in June, it was 307. It’s down to 177, this is a quant hold as well. I would mention with this company, it’s actually an industrial company, and they benefit by providing a lot of supplies and infrastructure to data centers and to utilities. It’s sort of a situation where it’s similar to Generac.

Some of the year over year numbers you can see grades in yellow, and some of the forward numbers you see are quite strong. So forward revenue growth is 13.5%. EPS growth going forward is 18 and a half percent compared to the sector at 11.89. the revisions of C, I believe they have one of the biggest backlog orders that they’ve ever had. So even though a couple of the quarters came in a little bit spotty with these huge backlog orders.

The future should look a little bit better. More in the semiconductor space, but still more of a supplier and not an actual producer of semiconductors. We find Celestica (CLS), this is another stock in June it was 458. Right now it’s 339. It’s up almost 5% in trading this morning.

So seeing these stocks that I’m talking about right now that were actually up yesterday when the Dow was down one percent, kind of gives me a vote of confidence that that full valuation compression has largely been baked into the stocks.

And on the back of good news, we’re seeing these stocks really take off. So I’m seeing on the back of news that’s not great with the Fed taking the target rate up by twenty-five basis points and a projection of another twenty five basis point hike, which will most likely happen after the election.

It does provide additional headwinds for the market, but stocks where we saw a rotation from a risk on, risk off, it looks like on the back of this rate hike, investors are actually going back to the risk on trade.

As I said, the valuation compression has taken place already and with a validation of orders coming in, and most of these companies have actually reported on their last quarter record revenues and record earnings. I think we are in for a good period for many of these stocks.

Rena Sherbill: We love a robust answer. We love other options. in our last piece of news for today, Kroger (KR), the grocer, said a summer outbreak of cyclosporiasis cost the grocer more than a hundred million in lost sales as concerns over the contaminated produce weighed on customer traffic.

And Kroger lowered its fiscal year identical store sales outlook, excluding fuel to between point two and point eight percent from its previous forecast of between one and two percent.

The company said the impact continued into Q3. Steve, what do you have to say about Kroger?

Steven Cress: Since the market acts as a forward discount mechanism, a lot of this was baked into the stock already. You can see it’s barely down today.

We’re at an uptape and perhaps it’s on the confirmation of the news. I would say overall with Kroger literally digesting this news event and perhaps having a bit of an impact today, it’s down moderately.

I think largely it’s already been discounted into stock. But having said that, Quant has had a hold on it. Our Seeking Alpha contributor consensus was a buy and Wall Street consensus was a buy, but for a stock that’s in the consumer staple sector and where there’s largely been a big rotation to consumer staple stocks, this one has not benefited.

And I believe one of the reasons why is despite the valuation, the growth does not look great for Kroger. So if we take a look at the forward growth, it’s a C minus grade, which gives you that instant characterization. That growth is below that of the sector.

And indeed, by looking at the absolute data, you can see growth, forward growth for the company is only 1.23% versus the sector at three and a half. if you scroll down, the year over year numbers look awful for earnings per share. They actually fell by 56% year over year. That’s not a pleasant picture.

Going forward, it does look a little bit better. EPS is estimated by consensus for analysts at a growth rate of 7.24% versus the sector at 5.8. So that you know makes the future look a little bit better. Free cash flow for the company is very strong too. The forward free cash flow growth is almost 20% compared to the sector at 5.3%.

And the company’s ROE is growing at twelve point six percent. So that’s not the ROE rate, that’s the actual growth of the ROE. the forward estimate is at twelve percent versus flat for the sector. So there are some growth numbers going forward that look good, but the year over year actual numbers are dragging it down.

So that overall grade is D plus, hence the hold recommendation in terms of analyst revisions for the stock in the last ninety days.We’ve only had two analysts that have taken their estimates up, and eighteen analysts have actually revised their earnings estimates down. That’s painful.

Although I will say for the upcoming quarter, ten analysts revised up and eight revised down. So not quite as painful for the quarter as for the full year look, but certainly not positive enough to be out there buying the stock.