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Stocks of the Week: Costco, AMC, Meta and More

Earnings reports are still coming in for some Wall Street favorites.

The new trading week brings new quarterly reports, the latest Omicron news, the regulatory outlook for Chinese companies, and renewed concerns over the potential default of China Evergrande  (EGRNF)  – and that’s just for starters.

Additionally, the Federal Reserve is looking to potentially accelerate its bond tapering program and the People's Bank of China announced a reserve requirement cut slated for December 15.

“Waffling through those concerns, investors will be listening closely to Peloton  (PTON) - Get Peloton Interactive, Inc. Class A Report  and Lululemon Athletica  (LULU) - Get Lululemon Athletica Inc Report this week following opposing lawsuits between the two companies,” TheStreet.com’s Action Alerts Plus team noted in a new note. “Investors in PTON shares will also want to hear what's next on the company's product roadmap, with speculation calling for a rowing machine.”

The AAP team is also looking at quarterly results from Toll Brothers  (TOL) - Get Toll Brothers, Inc. Report, with a special focus on input pricing comments for copper, lumber, and other key items as well as their availability. “The big question is if the company is paying up for all of these as it looks to meet targeted home deliveries, and if so, what's the likely margin and EPS hit?,” the AAP noted.

The Omicron variant remains in the news, as well, although traders seem to be increasingly relieved the latest Covid strain doesn’t appear as threatening as originally feared. The Covid embers keep flickering as the seven-day average for new coronavirus cases in the U.S. is up over 50% since the October lows.

The good news is that the early signs concerning the severity of the Omicron variant are faint. The variant has now been detected in about 40 countries and in nearly a third of all U.S. states, leading the FDA to potentially streamline authorization for revamped vaccines.

Meanwhile, investors will have an eye out on Dave & Busters  (PLAY) - Get Dave & Buster's Entertainment, Inc. Report , GameStop  (GME) - Get GameStop Corp. Class A Report, RH  (RH) - Get RH Report, and Costco Wholesale  (COST) - Get Costco Wholesale Corporation Report, an AAP holding, when they report their latest quarterly results this week. Traders will also be parsing comments from GameStop, RH, Costco, Lululemon, and Peloton for how they see the holiday shopping season shaping up, the AAP reports.

Over the weekend, the National Retail Federation said it now sees the 2021 holiday shopping season stronger than its prior forecast.

“The NRF now expects November-December holiday sales to hit an all-time high of between $834.4-$859 billion, up as much as 11.5% vs. 2020 and its prior forecast for an 8.5%-10.5% increase,” the AAP team wrote. “We'd note, the NRF's forecast excludes spending at not only automobile dealers but also gas stations and restaurants. We see that upsized forecast as a positive for several portfolio positions, including Amazon AMZN  (AMZN) - Get Amazon.com, Inc. Report, Walmart  (WMT) - Get Walmart Inc. Report, Apple  (AAPL) - Get Apple Inc. Report, Costco, Estee Lauder  (EL) - Get Estee Lauder Companies Inc. Class A Report, and Mastercard  (MA) - Get Mastercard Incorporated Class A Report.”

Meta Platforms/Facebook  (FB) - Get Meta Platforms Inc. Class A Report $314.61 5-Day Performance (-) 6.86%.

With Morningstar calling Meta Platforms a “wide-moat” firm with a solid network effect and intangible assets, the stock analysis company says Meta is “undervalued” right now.

“Yet Meta has entered a bear market -- dropping more than 20% from its Sept. 1 record, amid an onslaught of criticism and regulatory action against it,” reported TheStreet’s Dan Wiel. “The S&P 500’s 5% correction since Nov. 22 hasn’t helped either.”

The Menlo Park, Calif., social-media giant is still up about 12% year to date amid strong financial performance. Morningstar prefers to look at the glass as half-full. Morningstar analyst Ali Mogharabi puts fair value for Meta/Facebook at $404.

“We have not changed our view on Meta and continue to rate it a wide-moat firm with a solid network effect and intangible assets as economic moat sources,” Mogharabi said in a recent research note after the company changed its name from Facebook. “As users on Facebook and Instagram continue to grow, admittedly at decelerating rates, we expect advertisers will keep coming.

“The firm last reported that 3.58 billion people access at least one of its apps per month, generating first-party data to improve ad effectiveness, offsetting challenges like Apple’s iOS changes. We also expect e-commerce to drive further top-line growth.”

Meta’s augmented- and virtual-reality offerings represent less than 5% of total revenue now, Mogharabi noted.

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“However, we think monetization opportunities will come from both sales of additional virtual reality hardware and revenue sharing with merchants and content creators selling digital or physical products.”

Mogharabi is hardly alone.

Newbridge Securities Chief Market Strategist Donald Selkin told Bloomberg that Meta is reasonably valued now, with the recent drop reflecting all the bad news. “It’s worth sticking your toe in the water,” he said.

Peloton $41.72 5-Day Performance (-) 6.01%. 

So far, 2021 hasn’t exactly been a banner year for Peloton, which has been sidelined by one operational headache after another.

The company had to “ lower prices for equipment to levels still far too expensive for middle-class consumers,” said TheStreet’s Stephen Guilfoyle recently. “Cyber Weekend" came and went without giving the shares a boost,” he added. “That was even with the discovery of a new and highly transmissible variant of Covid-19 in southern Africa that is apparently already almost everywhere.”

Peloton has its backers, however.

“On Friday morning, Deutsche Bank's Chris Woronka (Rated four stars at TipRanks) has a "buy" rating and a $76 target price,” Guilfoyle said. “Woronka writes that he sees scenarios where Peloton trades lower, but he also sees more scenarios that result in a greater upside for the home fitness company's earnings power in what he class a "normalized" and "fully reopened" economic environment. Woronka thinks that a future that highly integrates with the hybrid work model plays out well for Peloton.”

Current quarter (not to be reported until early February) consensus calls for a loss of $1.27 per share, with a range spanning from $-0.89 to -$1.51. Wall Street on average sees revenue at $1.17 billion, which is sandwiched in between a low expectation of $1.09 billion and a high of $1.24 billion.

“This would amount to sales growth of 10.4% year over year, and an acceleration over the anemic 6% growth reported for the firm's fiscal first quarter,” Guilfoyle noted. “The net loss of $-1.27 would be comparable to an adjusted profit ($0.20) for the year ago period.”

PTON’s balance sheet may not be an outright disaster, but the trend is moving in the wrong direction.

“Cash and short-term investments combined are larger than long-term debt,” Guilfoyle noted. “That said, at the end of the September quarter, the net cash balance stood at $924M, down from $2.685B just six months earlier. Then, there's the entry for accounts payable that lands at $970M in September, up from $364M just three months earlier. This measures up against accounts receivable of just $81M, which is not favorable to shareholders.”

Current assets do outweigh current liabilities, and total assets do outweigh total liabilities less equity and cash flow woes add to Guilfoyle’s concern about Peloton.

“The bottom line is these fundamentals did not convince me to go out and get long the stock,” he added. “You may have a different opinion. That's what makes a market. Peloton might be worthy of speculation, but realize that speculation is what an investment in Peloton is all about.”

Costco Wholesale  (COST) - Get Costco Wholesale Corporation Report $530.78 5-Day Performance (-) 4.34%. 

Last week, Real Money’s Bruce Kamich took a fresh look at Costo, whose earnings report is imminent.

We reviewed the charts of Costco Wholesale on November 4 and wrote: "Continue to hold your longs in COST. These kinds of gains can make your investing year. $532 is our nearest price target followed by $622 and then $759. Raise stops to $445 from $369,” Kamich said. “Prices have pulled back in recent sessions on talk of some decline in monthly sales figures.”

“This "news" comes ahead of their quarterly numbers due on December 9,” he added.

Kamich’s charting showed that prices reached and temporarily exceeded his $532 price target. “But this could be older longs taking profits,” he noted. “Prices have dipped in recent sessions and may have been dragged lower by the slump in the broad market averages.”

Additionally, COST is still above the rising 50-day moving average line as well as the rising 200-day line, while the On-Balance-Volume (OBV) line is now showing a small peak. Additionally, the COST chart’s Moving Average Convergence Divergence (MACD) oscillator has crossed to the downside for a take profit sell signal.

No doubt, the charts are sending a message on Costco.

“I will assume that traders have booked some profits at our $532 price target,” Kamich said. “Earnings are approaching and the movements in the broad market averages have probably put some investors on edge. Raise stops to $505 from $445.”

AMC  (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report $28.91 5-Day Performance (-) 21.53%. 

AMC is the horror movie nobody wants to spend $20 to see (not including the price of a $12 popcorn and a $8 cherry lemonade.)

You almost can’t blame AMC’s management team, which has struggled with industry realities. As the data rolls in, the theater complex parking lots remain empty, and the realization hits home that the movie business has changed.

That's not good for AMC shareholders, said TheStreet’s Daniel Kline.

“On December 3rd, AMC stock closed at roughly 15 times it's 52-week low when the market closed,” Kline wrote. That’s down from its “52-week high of $72.82, but it's still enough to give the money-losing movie theater company a market cap of nearly $15 billion.”

Kline noted that some of those gains have come because the company has become a meme stock and many people bought shares, not because of AMC's merits but because there was heavy short interest in the stock. Others, however, have held onto their shares in the company because they see the movie business making a comeback when the pandemic becomes nothing more than an unpleasant memory.

“The problem is that a return to normal does not make AMC a profitable company. In 2019 -- the year before the pandemic -- the theater chain lost $149 million,” Kline added. “That was a drop from a $110 million profit in 2018, and that year delivered record domestic box office sales.”

Movie ticket sales by number (not dollar volume) peaked in 2002 at 1.57 billion. In 2018 they came in at 1.31 billion and in 2019 1.22 billion tickets were sold at the domestic box office. When adjusted for inflation, the dollars taken in fell accordingly with 2002 bringing in $14.43 billion while 2018's generated $12 billion and 2019 produced $11.25 billion in box office sales., according to data from The Numbers.

“Basically, even a post-pandemic return to normal leaves AMC selling fewer tickets than it needs to make a profit,” Kline said. “Ticket sales are, of course, not the only revenue source for the movie theater company but fewer people in the theaters means fewer people to sell popcorn, soda, and whatever else to.”

Other industry watchers share the same downbeat view, which sinks AMC shares even further.

"The post-pandemic box office will never be the same as it was before coronavirus hit the world in 2020," wrote ScreenRant's Stephen M. Colbert. "The damage done to theaters, industry changes in response to the pandemic, and a higher level of concern and awareness about public spaces means a full box office recovery doesn't seem likely.”