Suddenly, the U.S. equity market looks very different. As I’ve long worried, rising Treasury yields have unnerved Main Street and Wall Street, leading to two major declines this week. But to get a sense of the market there are still important earnings reports to watch.
As I’ve noted for a couple of weeks now, the only driver left for the market as a whole is corporate earnings. And even that hasn’t been enough the last few sessions. With earnings season coming to an end, more volatility could be on the way, as investors are left with only external factors to focus on.
Next week, then, seems like a big week for the market overall, as it tries to regain its footing.
And for these three stocks, the combination of increased market-wide volatility and important fourth quarter earnings means big moves are possible. Each would have the potential for a major post-earnings swing in a normal market environment. After the last few sessions, it seems like almost anything is possible.
Here are my three earnings reports to watch for the week of February 12.
Earnings Report Date: Wednesday, February 14 before market open
Wednesday’s fourth-quarter report from Groupon Inc (NASDAQ:GRPN) is important for a number of reasons. From a fundamental standpoint, the holiday quarter is Groupon’s biggest in terms of sales and profits. Looking at the chart, Groupon stock is holding support right around $5 — which means a Q4 miss could send GRPN tumbling.
After all, Groupon stock traded below $3 as recently as June. Since then, however, optimism has grown toward the company’s turnaround. Increased marketing, cost-cutting elsewhere and a sharper focus on the legacy Local business have led earnings to increase this year despite lower revenue.
Groupon needs to keep the momentum going in Q4 — and guidance for 2018 will be watched closely as well. At roughly 10x EBITDA and ~25x free cash flow, GRPN has upside if it can convince investors it can generate consistent growth. But that’s a big ‘if’ for a company that has lost over half a billion dollars since going public — and has seen its market capitalization decline some $10 billion from post-IPO levels.
As a result, a big move seems possible on Wednesday. Indeed, the options market is pricing in a whopping 15% move next week. Given how important the fourth quarter will be, Groupon stock easily could post that type of gain — or loss.
Earnings Report Date: Thursday, February 15 before market open
If history is any guide, small business-focused e-commerce platform Shopify Inc (US) (NYSE:SHOP) will beat Street estimates with its Q4 numbers. Shopify has topped consensus on both the top and bottom lines in each of the ten quarters since its 2015 IPO.
That streak is one reason SHOP has risen almost 600% from its initial price of $17. A short attack from Citron Research in October momentarily hit SHOP stock, but it touched a new all-time high last week before pulling back in the jittery market of the past few sessions. Torrid growth and an expanding user base have driven the stock steadily higher.
That torrid growth should continue in Q4. The Street projects a 60% increase in revenue in the key holiday quarter, and 45% in 2018. Analysts have proven too conservative in their estimates for Shopify so far — and likely will be so again on Thursday.
But the more interesting question is whether even a beat will be enough to send SHOP back toward those all-time highs. At roughly 17x fiscal 2017 revenue and a whopping 447x forward earnings, Shopify stock has one of the highest valuations in the entire market. At those levels, jittery investors may sell first and ask questions later if there’s any sign of trouble in the Q4 numbers, or any projected deceleration in 2018.
So another modest beat probably isn’t enough to drive big gains; Shopify needs a blowout quarter. Anything less could send SHOP tumbling back toward $100.
Earnings Report Date: Thursday, February 15 after market close
For a brief moment, Shake Shack Inc (NYSE:SHAK) managed to break out of its long-held trading range. Hopes that tax reform would benefit the restaurant space sent SHAK soaring beginning in late November. SHAK closed the second trading session of 2018 at a two-year high above $47.
Since then, however, SHAK has faltered, dropping 16%. And so Thursday’s fourth quarter report gives Shake Shack a chance to stem the bleeding — and perhaps get out of its multi-year range.
A post-earnings breakout may be too much to ask for. This remains one of the biggest battleground stocks in the market. SHAK trades at 70x next year’s earnings, despite projected earnings growth of just 10%. Not coincidentally, over 39% of the float is sold short.
I’ve long liked SHAK, recommending it at $31, and the long-term story still looks intriguing. Brand equity is impressive, the product is outstanding and there remains plenty of room to expand the chain.
But competition is intense, and at some point Shake Shack needs to turn its potential into profits. Without some good news on that front on Thursday, SHAK’s recent declines may accelerate in the near term, even if its long-term story remains intact.
Hilary Kramer is the editor of GameChangers, Breakout Stocks, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.