Spectrum Brands Digesting Gains From Its One-Day Gain Of 17.79%

Shares of Spectrum Brands Holdings NYSE: SPB gave up some gains after the stock's 17.79% rocket ride on September 8.

Even so, the stock is still holding near its high of $97.83, reached that day on the heels of a $4.3 billion deal to sell its hardware and home improvement business to Sweden's ASSA ABLOY.

Investors clearly cheered the all-cash deal, including Spectrum's plans to use proceeds to pay down debt.

Spectrum also said the transaction allows it to get more focused around three business units: Home & garden, global pet care and personal care.

The company's home & garden brands include Garden Safe and Black Flat. Its pet care brands include Eukanuba, Nature's Miracle and Furminator. On the home & personal care side, brands include Remington, Black + Decker and George Foreman.

Although the current chart pattern is still healthy, the stock is more than 5% below its buy point, meaning the September 8 breakout may be at risk. 

Spectrum Brands began forming its most recent base on May 11, when the stock gapped down from the previous day's high of $97.27. That gap-down occurred the same day the broader market also gapped lower.

From there, Spectrum Brands went on to form a cup-shaped pattern. It was the first base since the great 2020 meltdown. In 2020 and early 2021 shares traveled higher along their 50-day moving average until the May gap lower, which got the cup base started.

The stock advanced 18.04% year-to-date and 64.88% in the past year.

The fact that the recent base is categorized as "first stage" is encouraging. That means the stock took its first break after that long run-up, allowing investors to add shares or initiate a position at a lower price - which is exactly what happened in early September.

A first-stage base can set the stage for a lengthy run-up, although that's generally more likely if the broader market is also in rally mode.

In addition, the fundamentals and the business case for this company make it a stock to watch.

Revenue grew at double-digit rates in each of the past four quarters. The three-year annualized revenue growth rate is just 2.27%, although revenue grew in the past two years.

Other fundamental metrics over the past three years include:

• Operating Income 1.58%
• Net Income -2.65%
• Diluted EPS -12.82%

Those income and earnings declines can be understood at a glance, when you realize that earnings declined in 2019.

And if you are thinking that 2020 was a bust, as the pandemic era began, you'd be wrong. Spectrum Brands is well situated as a "stay home" play. As such, earnings grew in 2020, from $2.99 per share to $4.10 per share.

Even without draconian lockdowns, consumers are spending more money to outfit their homes these days. That trend is probably not going to end anytime soon. Analysts see Spectrum earning $6.26 this year, a 53% year-over-year gain. Wall Street also expects another 6% gain in 2022, to $6.63 per share.

MarketBeat data shows analysts' consensus rating on Spectrum Brands is a "buy," with a price target of $101.57, marking a 0.73% upside. The day after the deal with ASSA ABLOY was announced, Deutsche Bank boosted its rating on Spectrum from sell to buy, and lifted its price target from $108 to $110.

Institutional ownership is a good guideline for understanding a stock's future prospects. The number of funds owning shares decreased in the most recent quarter, from 584 to 561. That's not particularly surprising, given the downturn in the quarter ended in June.

Even if more funds don't buy in, the percentage of shares owned by institutions is worth tracking. Total inflows were greater than total outflows in the second quarter, even as the stock corrected.

The current pullback from the September 8 high may result in another base, which could still be very constructive. The wild card, with this stock and pretty much any other right now, remains the health of the broader market.