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SMART Global, Zillow Group, ConocoPhillips, EOG Resources and Suncor Energy highlighted as Zacks Bull and Bear of the Day

·14-min read

For Immediate Release

Chicago, IL – December 3, 2021 – Zacks Equity Research Shares of SMART Global Holdings, Inc. SGH as the Bull of the Day, Zillow Group, Inc. ZG as the Bear of the Day. In addition, Zacks Equity Research provides analysis on ConocoPhillips COP, EOG Resources, Inc. EOG and Suncor Energy Inc. SU.

Here is a synopsis of all five stocks:

Bull of the Day:

SMART Global Holdings is the under-the-radar semiconductor stock you’ve been looking for, with its broadening portfolio of cutting-edge chips that are poised to take flight in this commencing technological Renaissance.

SGH is roaring out of the shadows with an ambitious growth strategy that won't remain under the radar for much longer. Now is the time to add this hidden gem to your portfolio before the broader investing world catches wind of this discounted chip winner.

SMART Global has been around since the late 80s, but it wasn’t until Mark Adams took the helm amid the pandemic last year, that this chip-maker’s upside potential went through the roof. Adams is transforming this once complacent memory-focused legacy tech company into a motivated innovative leader.

Adams was the leader force behind SGH’s quick strategic acquisition of Cree’s niche LED chip business at the peak of pandemic fear for a steal at $300 million. Cree LED’s synergies are already paying dividends as it drives margin expansion, improves the firm’s capital & operational efficiency, and provides critical industry relationships.

Smart Global’s new forward-thinking chief has already vastly improving its operational performance and is ramping up R&D spending to ensure that the enterprise remains ahead of the innovative curve.

Analysts are getting increasingly bullish on this under the radar comeback play as SGH flips the switch on accelerating profitable growth, knocking estimates out of the park by an expanding percentage over the past 3 quarters. Zacks Consensus EPS Estimates for SGH’s have been soaring across all time horizons driving the stock into a Zacks Rank #1 (Strong Buy) and all 5 covering analysts agree on the unique value opportunity here.

The Business

SMART Global Holdings had been a reliable pure-play memory leader in the chip space for over 30 years before deciding to broaden its product portfolio, which appeared to be catalyzed by activist investors following SGH's 2017 IPO. The company has since executed 4 strategic acquisitions.

Penguin Computing was SGH's first vital acquisition ($85 million price tag) back in 2018, adding a broad portfolio of leading next-generation products, including high-performance computing (HPC), cloud computing, hyperscale data centers, and the development of artificial intelligence (AI). This segment has exploded since its acquisition as its AI-focused products experience budding demand. 

In the summer of 2019, this resourceful chip giant acquired Artesyn Embedded Computing and Inforce Computing for $80 million and $12 million, respectively. Artesyn (which is now called Smart Embedded Computing) provides critical data center architecture used in "industries such as telecom, military and aerospace, medical, and diverse automation and industrial markets," according to its website.

SMART Wireless Computing (formerly known as Inforce Computing) exposes the enterprise to cutting-edge technologies like "medical imaging, collaboration/videoconferencing, wearable hands-free computing, and robotics/unmanned aerial vehicles," according to its investor relations page.

SMART's diverse set of growing end-market demand provides the company with an enormous total addressable market (TAM), significant upside potential, and not to mention an excellent hedge against the cyclical nature of the semiconductor market.

SMART Global was able to more than double its profits in FY2021 (ending August 27th, 2021) on rapidly expanding margins and accelerating sales growth, which reached record levels this past quarter.

The 11x forward P/E that SGH is currently trading at is a remarkably discounted valuation multiple for a high-growth semi business that is expected to exhibit consistent 20%+ earnings growth in the years to come.

Semiconductors Skyrocket

The digitalizing impact of the global pandemic didn't just pull forward demand but propelled economic adaptation of advancing technology a decade ahead. Digital chips are at the core of all technology. This sector is on a prolific growth trajectory (characterized by Moore's Law) that will generate outsized returns for the best-positioned equities in the space.

The backbone of rapidly advancing digital technology, semiconductors, have been on an absolute tear since mid-October, with the VanEck Vectors Semiconductor ETF, the go-to benchmark for the chip space, having rallied over 20% since. This sector has been incredibly resilient to the recent COVID-fueled sell-off, leading me to believe we could be in for a slingshot price move higher once fear exits the public markets.

The most advanced computing chips have received the largest bid as investors look past short-term supply chain hiccups and towards the insatiable demand for next-generation tech.

Final Thoughts

With its fresh innovation-oriented operational outlay, Mark Adams at the helm (with a now proven track record of skilled management), and an industry-wide outlook of accelerating growth, the future SGH has never been brighter.

Bear of the Day:

Zillow Group has been under significant pressure since it peaked in mid-February, with its latest earnings report at the beginning of November spelling tragedy almost every way you look at it.

ZG has lost 75% of its value in the past 9 months, and analysts are still bearish on this seemingly mismanaged homebuying application as earnings estimates for the next couple of years drop precipitously, pushing Zillow into a Zacks Rank #5 (Strong Buy).

Overleveraged Operations Reveal a Careless Management Team

Zillow missed big on both its top and bottom-lines in its Q3 earnings report released November 2nd exhibiting its most significant quarterly earnings deficit to date. As the booming housing market cooled off this past quarter, the company accumulated a massive $422 million loss in its Zillow Offers segment (digital house flipping) as it buys too much too fast. Offers' one-quarter loss almost doubled its total 2020 losses.

This led to management's abrupt move to completely exit the iBuying game (aka Zillow Offers), the catalyst for this bearish write-up. Zillow's co-founder & CEO Rich Barton cited the volatility and unpredictability of forecasting home prices as the primary reasoning for winding down Zillow Offers.

This significant operational shift came out of left-field, with the prior quarter's report highlighting the success of the Zillow Offers division. This digital real estate giant's AI-powered software for buying and selling homes was overpaying for thousands of homes, leading to this sudden business transformation. Zillow announced that it would be cutting its staff by 25% (roughly 2,000 employees) to pare future losses and will be off-loading the nearly 10 thousand homes currently in its inventory in the coming quarters (likely for a loss).

It's ironic because when Zillow Offers was initially announced that its plans to enter the iBuying business in 2018, most of its investors ran for the, cutting the price of ZG in half that year. The digital house flipping game is risky because of the extreme amount of leverage required to execute the level of real estate ownership Zillow had eventually come to.

However, Zillow Offers began showing a robust trend towards profitability amid the pandemic and revealed positive returns in its prior 3 quarterly reports (Q4 2020 to Q2 2021). Investors had begun getting optimistic about the opportunity in this house-flipping market as residential real estate prices across the country continued to skyrocket, and ZG's proprietary model had seemingly proven itself.

Ultimately, Zillow overleveraged its house-flipping operations, which I primarily attribute to blind greed, leading to the stock's recent capitulation. Its Q3 balance sheet revealed that its credit facility borrowing had ballooned 300% in just one year to $2.67 billion, not to mention its total liabilities have nearly doubled. At the same time, its volatile housing inventory exploded with a constant stream of apparently overvalued purchases driving this asset line item's total value to $3.76 billion, 7.7 times its inventory from a year prior.

There is no doubt that Zillow overextended itself in the iBuying space, and now it's paying the price.

Zillow was far from the only iBuying real estate player out there, with start-ups like Opendoor Technologies and Redfin engaging in similar business lines. RDFN's share performance is almost an exact mirror image of ZG, while OPEN appears to be the outperformer. We will see if Opendoor can maintain its relative outperformance following its earnings after the bell this evening.

What Now?

Investors were slowly walking out the door following the frothy, nearly $50 billion valuation that ZG reached in February. However, now that the stock's most significant topline driver (finally demonstrating positive returns in recent quarters) is being completely abandoned, shareholders are sprinting for the exit, while analysts downgrade ZG like there is no tomorrow for this company.

The Pollyanna of market-disrupting innovators, Cathie Wood, has even been dumping ARK Invest ETF (ARKK) ZG stake as management illustrates a lack of competence this past quarter. ARKK has sold out of 83% of its Zillow position following the dreadful Q3 report at the beginning of the month. With dip-buying money managers like this jumping ship, I wouldn't be touching this stock.

Analysts have dropped price targets across the board, with some taking their once lofty projected targets down below its already capitulated price tag. I'm not recommending you short this unpredictable stock, but I would avoid it until its management team can get their ducks in a row.

Additional content:

Here's How the EIA's Inventory Report Affected Oil Prices

U.S. oil prices slid on Dec 1, as a higher-than-expected build-up in fuel inventories and worries over a slowdown in energy demand from the spread of the coronavirus Omicron variant outweighed the fall in domestic oil stocks. Moreover, energy traders largely stuck to the sidelines, awaiting today’s OPEC+ ministerial meeting and the carte’s response to the latest twist in the global health scare.

On the New York Mercantile Exchange, WTI crude futures lost 61 cents, or 0.9%, to settle at $65.57 a barrel.

Below we review the EIA's Weekly Petroleum Status Report for the holiday-shortened week ending Nov 26.

Analyzing the Latest EIA Report

Crude Oil: The federal government’s EIA report revealed that crude inventories fell 909,000 barrels compared to expectations of a 2.7-million-barrel decrease per the analysts surveyed by S&P Global Platts. An uptick in exports primarily accounted for the stockpile draw with the world’s biggest oil consumer even as higher production and imports limited the quantum of decline. Total domestic stocks now stand at 433.1 million barrels — 11.3% less than the year-ago figure and 6% lower than the five-year average.

On a somewhat bearish note, the latest report showed that supplies at the Cushing terminal (the key delivery hub for U.S. crude futures traded on the New York Mercantile Exchange) were up 1.2 million barrels to 28.5 million barrels.

Meanwhile, the crude supply cover was down from 28.3 days in the previous week to 27.9 days. In the year-ago period, the supply cover was 35.1 days.

Let’s turn to the products now.

Gasoline: Gasoline supplies increased for the first time in eight weeks. The 4 million-barrel addition is attributable to lower demand and higher imports. Analysts had forecast that gasoline inventories would rise by 900,000 barrels. At 215.4 million barrels, the current stock of the most widely used petroleum product is 7.8% less than the year-earlier level and 5% below the five-year average range.

Distillate: Distillate fuel supplies (including diesel and heating oil) rose last week after falling for three weeks in a row. The 2.2 million barrel increase primarily reflected higher production and a pullback in demand. Meanwhile, the market looked for a supply climb of 1 million barrels. Current inventories — at 123.9 million barrels — are 15.1% below the year-ago level and 9% lower than the five-year average.

Refinery Rates: Refinery utilization, at 88.8%, moved up 0.2% from the prior week.

Final Words

WTI settled lower yesterday, following builds in gasoline and distillate inventories due to a decrease in consumption. Fears of a slowdown in oil demand recovery amid detection of the first case of Omicron in the United States also dragged down the commodity on Wednesday. Traders remain wary that the spread of the newest variant of coronavirus will spur a flurry of renewed curbs by governments to check its transmission, posing a risk to demand.

While there are reasons to be cautious, the overall Oil/Energy market looks well-positioned with a supportive macro backdrop and robust fundamentals. Widespread COVID-19 vaccine rollouts, the ongoing government stimulus and the OPEC+ cartel’s calibrated production policy have contributed to this positive setup.

Crude supplies recently fell to their lowest levels since October 2018, with U.S. commercial stockpiles down nearly 14% since mid-March. Taking Cushing as an indicator, the oil market has already tightened considerably. Stocks fell to 26.4 million barrels at the key storage hub last month, the lowest in more than three years.

There is also a marked improvement in fuel demand on the back of rebounding road and airline travel. In fact, strong consumption of gasoline pushed inventories to the lowest level in four years just last week.

To take advantage of oil’s robust outlook, one might build a position by tapping into the below-mentioned Zacks Rank #1 (Strong Buy) oil companies.

You can see the complete list of today’s Zacks #1 Rank stocks here.

ConocoPhillips : The company has a projected earnings growth rate of 710.3% for the current year. The Zacks Consensus Estimate for ConocoPhillips’ current-year earnings has been revised 21.8% upward over the last 60 days.

ConocoPhillips beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 13%. COP shares have gained around 78.5% in a year.

EOG Resources : The company has a projected earnings growth rate of 495.2% for the current year. EOG Resources’ consensus estimate for the current year has been revised 15.9% upward over the last 60 days.

The oil and gas finder beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters, the average being 29.8%. EOG has rallied around 84.8% in a year.

Suncor Energy : The company has an expected earnings growth rate of 318.2% for the current year. The Zacks Consensus Estimate for Suncor Energy's current-year earnings has been revised 27% upward over the last 60 days.

Suncor Energy beat the Zacks Consensus Estimate for earnings in two of the last four quarters but missed twice. SU has a trailing four-quarter earnings surprise of roughly 7.5%, on average. The Canadian oil behemoth has rallied around 48.1% in a year.

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