Following the success with GameStop Corporation (GME) earlier this year, Reddit's WallStreetBets (WSB) community, which is known for betting on heavily shorted companies and squeezing out short-selling hedge funds, has triggered price rallies in many other stocks, irrespective of their fundamental strength.
While WSB typically targets fundamentally weak stocks with a considerable level of short interest, we believe that a few of the subreddit’s heavily discussed stocks possess sufficient fundamental strength to generate solid returns. AZZ Inc. (AZZ) and Del Taco Restaurant Inc. (TACO) are two such stocks. They could prove to be long-term winners on the back of their improving fundamentals. So, they could be solid bets now.
In contrast, with extremely high price levels relative to their underlying business fundamentals and financial strength, we think Root Inc. (ROOT) and Wrap Technologies Inc. (WRAP) could suffer a major pullback in the near term. Hence, these stocks are best avoided now.
Stocks to Buy:
AZZ Inc. (AZZ)
AZZ in Fort Worth, Tex., serves the power generation, transmission, distribution, refining, and industrial sectors in the United States and abroad with galvanizing and metal coating solutions, welding solutions, specialty electrical equipment, and engineering services. Infrastructure Solutions and Metal Coatings are the company’s two operational segments.
AZZ’s sales increased 7.8% year-over-year to $229.83 million in the first quarter, ended May 31, 2021. Its operating income grew 114.5% from its year-ago value to $30.71 million. The company’s net income surged 303% from the prior-year quarter to $22.34 million, while its EPS increased 319% year-over-year to $0.88.
AZZ’s EPS is expected to grow 43.6% year-over-year to $3.03 in its fiscal year 2021. Analysts expect AZZ’s revenue to increase 10.2% year-over-year to $924.2 million in the current year. The stock has gained 49.6% in price over the past year and 15.2% year-to-date.
AZZ's POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
AZZ is also rated A for Momentum, and a B for Sentiment and Quality. Within the B-rated Industrial – Machinery industry, it is ranked #22 of 81 stocks. To see additional POWR Ratings for Growth, Value, and Stability for AZZ, click here.
Click here to check out our Industrial Sector Report for 2021
Del Taco Restaurant Inc. (TACO)
TACO is the second largest Mexican quick-service restaurant in the United States. Its restaurants are known for offering Mexican-inspired as well as classic American dishes. The Lake Forest, Calif.-based company operated 600 restaurants across 16 states as of June 9, 2021.
This month, TACO signed a deal to set up five outlets in the Raleigh and Durham regions with Ram Restaurants Inc., a prominent North Carolina franchise company. With this collaboration, the company aims to expand its brand footprint in the Southeast U.S. and accelerate its growth.
For the second quarter, ended June 15, 2021, TACO’s total revenue increased 19.5% year-over-year to $124.97 million. Its operating income increased 148.5% year-over-year to $9.21 million over this period. Its net income came in at $6 million for this period, compared to a $576 million net loss in the first quarter of 2020. The company’s EPS totaled $0.16, compared to a $0.02 loss per share in the prior-year period.
The company's EPS is expected to grow 33.3% year-over-year to $0.48 in the current year. In addition, analysts expect TACO's revenue to increase 7.4% year-over-year to $528.16 million in its fiscal year 2021. TACO's stock has gained 6.1% in price over the past month.
It is no surprise that TACO has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has a B grade for Value, Momentum, and Quality. In the A-rated Restaurant industry, it is ranked #14 of 48 stocks.
In addition to the POWR Ratings grades I have just highlighted, one can see the TACO rating for Stability, Growth, and Sentiment here.
Stocks to Sell:
Root Inc. (ROOT)
ROOT in Columbus, Ohio, offers insurance products and services that include vehicle, house, and renters’ insurance in the United States. The company has a direct-to-consumer strategy and primarily serves clients through mobile applications and its website. In addition, its direct distribution channels cover digital, media, referral channels, and distribution partners.
During the second quarter, ended June 30, 2021, ROOT’s revenue declined 26% year-over-year to $89.8 million. The company’s operating loss grew 451.6% from its year-ago value to $172.1 million, while its net loss surged 359.1% from the prior-year quarter to $178.6 million. The company’s loss per share came in at $0.72 over this period.
Analysts expect its EPS to remain negative in its fiscal year 2021. In addition, ROOT’s revenue is expected to decline 56.8% year-over-year to $266.6 million in the current year. The stock has declined 45.8% in price over the past three months and 68.4% year-to-date.
Currently, ROOT looks highly overvalued. In terms of forward Price/Book, ROOT’s 2.14x is 77.1% higher than the 1.21x industry average. In addition, its 4.65x forward Price/Sales is 36.2% higher than the 3.42x industry average.
ROOT’s poor prospects are also apparent in its POWR Ratings. The stock has an overall F rating, which equates to Strong Sell in our proprietary rating system.
It also has an F grade for Value, Sentiment, and Growth. ROOT is ranked #54 of 55 stocks in the C-rated Insurance – Property & Casualty industry. Click here to see the additional POWR Ratings for ROOT (Stability, Quality, and Momentum).
Wrap Technologies Inc. (WRAP)
WRAP, a Tempe. Ariz.-based public safety technology and services provider, creates policing solutions for law enforcement and security professionals. The company develops BolaWrap 100, a hand-held remote restraint device that deploys an eight-foot bola-style kevlar tether to entangle a victim at 10-25 feet.
WRAP’s operating expenses increased 148.5% year-over-year to $7.74 million for the second quarter ended June 30, 2021. Its operating loss grew 174% from its year-ago value to $7.80 million. The company’s net loss surged 180% from the prior-year quarter to $7.79 million, while its loss per share increased 122.2% year-over-year to $0.20.
The company's EPS is expected to decline 73.7% and remain negative in the current year. WRAP's stock has declined 13.9% in price over the past three months and 5.5% over the past month.
In terms of forward Price/Sales, WRAP is currently trading at 26.67x, which is 578.7% higher than the 3.93x industry average. Also, in terms of its forward EV/Sales, the stock is currently trading at 21.86x, which is 445.1% higher than the 4.01x industry average.
WRAP’s POWR ratings are consistent with this bleak outlook. It has an F grade for Growth, Quality, and Value. The stock is ranked #88 of 92 in the C-rated Industrial - Equipment industry.
Beyond the POWR Ratings grades I have just highlighted, one can see the WRAP ratings for Sentiment, Stability, and Momentum.
Click here to check out our Industrial Sector Report for 2021
AZZ shares were trading at $57.86 per share on Tuesday morning, up $3.19 (+5.84%). Year-to-date, AZZ has gained 23.20%, versus a 17.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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