Can tractor supply inventory rise past the cup-with-handle buy point?



MarketBeat.com – MarketBeat

A classic cup-with-handle base is often a precursor to a stock’s run-up, and bargain Tractor Supply Company (NASDAQ: TSCO) forms just that type of consolidation.

The Tennessee-based company specializes in rural lifestyle goods, including hardware, livestock and pet supplies, lawn and garden supplies, fencing, mowers and apparel.

It is the country’s largest consumer farm retailer. As of September, it operates 2,027 Tractor Supply stores in 49 states and an e-commerce platform. In October it bought 81 stores from Orscheln Farm and Home. These will be renamed Tractor Supply by the end of next year.

Tractor Supply also owns Petsense by Tractor Supply, a small-box pet specialty supply chain primarily in small and medium-sized communities. It operates 180 Petsense stores in 23 states.

MarketBeat analyst data for the company shows a “moderate buy” rating with a price target of $235.94 and a potential upside of 10.88%.

Analysts expect more store openings

Morningstar analyst Jaime Katz writes that she expects Tractor Supply to grow to about 3,000 stores by 2031, including Petsense. Over time, the company seems poised for growth, but what about the more immediate future?

Shares are up 14.41% over the past three months as the stock began etching the right side of a cup pattern in September. It rose to a temporary high of $229.81 on December 1 and has formed a handle since then. The cup-with-handle formation offers an early entry point before a stock regains the high price of the cup base.

As the handle formed, the stock fell 1.63% in the past month. You won’t see a handle drop of more than 10% or possibly 15% at first; it will mean that the setup has broken.

Another good sign in the current handle is: Trading volume has been below normal for the past two weeks as price has fallen. That’s ideal, as a large volume selloff can indicate a lack of conviction among institutional buyers. Instead, this handle (so far) appears to be the result of mild profit-taking. It can serve to shake out investors who lack conviction, and make it possible for more interested buyers to buy shares at a lower price.

But does the current setup suggest greater potential for gains than even the analysts see?

Can the tractor supply run higher to pass the cup-with-handle purchase point?

Shares were trading around $213.27 mid-session on Thursday. That’s about 7% below a potential buy point near $230. If the stock clears the buy point without the handle falling much further, the stock could have the juice to rise more than 10.88%, primarily if a broad market rally also provides a boost.

Sales, revenue continue to increase

Do Tractor Supply’s fundamentals suggest the stock is poised to rise in the near to medium term?

Its three-year revenue growth is 20%, and its three-year earnings growth is 29%. Revenue grew between 43% and 8% over the past eight quarters. One possible caveat: Revenue growth has slowed from mid-double-digit rates to single-digit rates over the past six quarters. Make no mistake: Sales are still increasing at healthy rates year-on-year, but less frenetically than before.

The income has also increased every year. For the full year, Wall Street expects net income of $9.62 per share, an increase of 12%. Next year, it is expected to grow another 9% to $10.47 per share.

As with many stocks, Tractor Supply’s price action has tended to track the broader market. For example, shares rose in five of the following six sessions following the company’s last earnings report on October 20. But as an incipient rally in the S&P 500 began in early November, Tractor Supply also fell. Even the current handle formation is happening in tandem with a moderate selloff in the S&P.

The cup-with-handle base, solid earnings and revenue growth and future projections make the stock an attractive monitoring candidate. Investors should resist the temptation to jump into a promising stock too soon, as their money could disappear while other stocks rise faster.

Leave a Reply

Your email address will not be published. Required fields are marked *