A classic cup-with-handle base is often a precursor to a stock’s run-up, and retailer Tractor Supply Company (NASDAQ: TSCO) is forming exactly that type of consolidation.
The Tennessee-based company specializes in items for rural lifestyles, including hardware, supplies for livestock and domestic animals, lawn and garden items, fencing, mowers, and clothing.
It’s the nation’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 acquired 81 stores from Orscheln Farm and Home. These will be rebranded to 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 mid-size communities. It runs 180 Petsense stores in 23 states.
MarketBeat analyst data for the company show 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 around 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% in the past three months as the stock began etching the right side of a cup pattern in September. It rallied to an interim high of $229.81 on December 1 and has been forming 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 declined 1.63% in the past month. You don’t want to see a handle decline of more than 10% or possibly 15% at the outset; that would mean the setup has broken down.
Another good sign in the current handle is: Trading volume has been below normal in the past two weeks as the price declined. That’s ideal, as a heavy-volume selloff could indicate a lack of conviction among institutional buyers. Instead, this handle appears (so far) to be the result of some mild profit-taking. That can serve to shake out investors who lack conviction, setting the stage for more interested buyers to nab shares at a lower price.
But does the current setup suggest more significant potential for gains than even the analysts see?
Shares were trading around $213.27 mid-session Thursday. That’s roughly 7% below a potential buy point near $230. If the stock clears that buy point without the handle sinking much further, then the stock may have the juice to rise more than 10.88%, primarily if a broad market rally also provides a lift.
Sales, Earnings Continue To Increase
Do Tractor Supply’s fundamentals suggest the stock is ready to rally in the near-to-medium term?
The three-year revenue growth rate is 20%, and its three-year earnings growth rate is 29%. Revenue grew between 43% and 8% in the past eight quarters. One possible caveat: Revenue growth has been slowing from mid-double-digit rates to single-digit rates over the past six quarters. Make no mistake: Sales are still increasing at healthy year-over-year clips, but less frenetically than before.
Earnings have been growing each year, as well. For the full year, Wall Street is eyeing a net income of $9.62 per share, an increase of 12%. Next year, that’s 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 advanced in five of the subsequent six sessions after the company’s most recent earnings report on October 20. However, as a nascent rally in the S&P 500 sputtered in early November, Tractor Supply also fell. Even its current handle formation is occurring 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 watchlist candidate. Investors should resist the temptation to jump into a promising stock too early, as their money may languish while other stocks rally sooner.
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