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Common Stock: Reduced - $500 to $100 (NYSE:GNRC)

Americans Turn to Home Generators as Large Parts of the Nation Experience Freezing Temperatures

George Frey/Getty Images News

Generac Holdings, Inc. (NYSE:GNRC) shares have definitely taken a big dip and are now barely trading above the $100 level. This represents a massive drop from a 52-week high at just over $500 per share. As a manufacturer of backup power systems, this company It’s a huge beneficiary of the housing boom and pandemic, which has caused so much spending while people work and work from home. Alongside the bull market in equities, it’s clear that the housing and stay-at-home boom is over. It’s also clear that investors are moving up when this stock hits more than $500 per share. But at the same time, there seems to be a bearish overshoot that is typical for stocks as sentiment and sentiment create extremes in both directions. Let’s take a closer look:

Company:

Generac Holdings is a leader in the power systems industry. It is the best selling brand of home backup generators and also makes products for the commercial market. Home backup generators have become increasingly popular in recent years. This growth was fueled by adverse climate events such as hurricanes in Florida and wildfires in California, which led to the blackouts. With ongoing climate events and the electrical grid looking strained in many states, it’s easy to understand why homeowners and businesses seek the stability a generator can provide.

Graphic:

There is a very interesting pattern in which many stocks and other assets are already returning to their pre-pandemic levels or appearing to be on the way. With the recent big drop in Generac stock, this stock has taken a big dip and is now returning to its pre-pandemic position. Frankly, investors were thrilled when they bought this stock for $500, but it looks like this stock could be a buying opportunity now, as the stock has now wiped out all the gains from the past few years. As you can see in the chart below, this stock was trading at around $100 per share in July 2020 (and is now around that level again). Then it hit over $500 per share in November 2021. But just then, the Federal Reserve started talking about the tightening that ended the bull market. In addition, we see that the rapid increase in interest rates significantly affected and ended the housing bubble.

I highly recommend that all investors look at a chart going back a few years to see if a stock is rising like Generac did under the pandemic, because there’s a good chance the stock will bounce back to pre-pandemic levels, just like Generac. This stock has made a round trip and others are returning to levels seen in 2020 and this could be true for all major market indices as well.

chart

StockCharts.com

Earnings Alert, Causing a 25% Plunge on Oct. 19:

On October 19, Generac announced earnings alert lowered its full-year outlook and reduced revenue guidance for Q3. Generac will report Q2 results on November 2, 2022, but now estimates net sales for the quarter to be approximately $1.09 billion, well below analyst estimates of $1.34 billion. It currently guides third-quarter net income to reach approximately $58 million, or 83 cents per share, a big drop from a year ago when net income was $132 million, or $1.93 per share. Finally, it cut its EBITDA margin estimates from 18-19% to 21.5% to 22.5%.

While this is certainly not disappointing but unexpected news, the good news is that analysts at CFRA Research are still expecting earnings of $9.35 per share for 2022 and $12.21 per share for 2023, as noted in this Quest for Alpha article. Based on these newly reduced forecasts, the level of economic uncertainty will likely remain high through 2023. However, even if this company earns only $8 per share next year, that share looks like a potential bargain at around $100 per share.

Potential Downside Risks:

The macro is no longer suitable for this company, with a deepening housing market crash and multiple headwinds ranging from recession to waning consumer confidence. As the Federal Reserve tries to regain control of inflation, we’re likely to see more layoffs in the weeks and months to come. If you receive a notice of layoff, you are unlikely to purchase a backup generator. Even if you stay in employment but start making family and friends who are no longer working, you’re also likely to cut back on big-ticket purchases.

Jeff Bezos, founder of Amazon (AMZN), recently said it’s time to “close the lids”, and other top corporate leaders have made similarly dismal comments, which may prompt many Americans to tighten their belts. The rapid pace of rate hikes by the Federal Reserve has been dramatic and historic, and this experiment may not end well. Along with these big macro risks, running management is a big risk because it is much easier to manage when everything is going your way, but now that the tide has gone, the real test of management skills awaits.

My Purchasing Strategy:

Right now, there is too much economic uncertainty to take a significant position in this stock. Also, there’s no way of knowing how much homeowners and consumers will reduce their spending as the economy weakens. People will also feel less wealthy as their home values ​​and 401(k)s drop. We’ll see how Generac management performs in this setback. Therefore, I will keep my purchases of these stocks very limited and only buy incrementally over the next few months. This will keep this investment at a rounding error level in my portfolio for the time being, and also allow me to take advantage of further weakness in this stock that could result from a market drop or additional company-specific issues. I expect the economy and the stock market to remain active for at least the next few months, but this may be the time to create positions in high-quality stocks that can offer long-term bullishness.

As a result:

With such a big drop in the share price and the stock is trading at about 9x the forecast for 2023, I need to buy some shares for around $109. However, this stock, and the equity market in general, could and probably will continue to be weak. We’re in unknown waters in terms of the Federal Reserve’s aggressive rate hikes. We must be able to play the long game and position ourselves in such a way that if a stock or market goes down, we have the purchasing power to take advantage of the drop. Generac is the top brand and market it caters to and looks set to grow in the long run.

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