Whirlpool Corporation (NYSE: WHR) stock is dropping the morning after reporting strong earnings after the market closed on July 21. In addition to posting a beat on the top line (5%) and bottom line (10%), the Michigan-based appliance manufacturer raised its guidance for the rest of the year.
Yet, in early morning trading, WHR stock is down over 3% in what seems to be a case of unfortunate timing. Just after the market opened, investors got the June home sales numbers. Sales were up, but only slightly. This gives credence to the concern that there simply aren’t enough homes to buy. And stocks of homebuilders such as PulteGroup (NYSE: PHM) are also falling in morning trading.
Of course, appliance sales were strong during the pandemic as millions of Americans refinanced their homes in order to undertake significant remodeling projects. And for many homes that meant new appliances. But how much of that demand was pushed forward? This seems to be the question that investors are weighing.
For its part, Whirlpool is planning on strong revenue for the remainder of the year. However, the company’s retail fortunes are frequently tied to home improvement chains such as Lowe’s (NYSE: LOW) and Home Depot (NYSE: HD). Those stocks are also down this morning.
And then there’s the opinion of analysts. Or I should say, the company may benefit from some fresh opinions. The analyst community has been quiet on the company for most of 2021. Perhaps the earnings report will give WHR stock a boost.
This is really a question of knowing what you own. Whirlpool has been a pandemic winner and behaving like a growth stock. It’s not and what is likely happening is a normal correction and one that long-term investors can act on.
The Inflation Blues
I was looking through the company’s investor presentation to see if it could provide any hint of why the stock was dropping. If I close one eye and squint, I can point to an item in the appendix where the company does cite that it expects substantial inflation to hit their cost of raw materials.
One of the obvious impacts in raw material costs comes from the price of steel. The trend towards stainless steel appliances remains strong. But as appliances are becoming more connected, the global chip shortage has been disruptive to the company’s supply chain as well.
However, if demand stays strong (which the numbers support), than the company is likely passing along this increase without pushback from the consumer.
Regressing to the Mean
Value investors could look at the drop in Whirlpool’s stock as a correction that needed to happen. In 2021, WHR stock is up about 18% which slightly outpaces the S&P 500 index’s gain of 15%. However, in early May, Whirlpool’s stock was up 42.9% for the year when the S&P 500 was up just over 14%.
That number is even more of an outlier when you consider that over the last five years, WHR stock has produced a gain of 11%,
Whirlpool is not a meme stock by any means. However, the stock has seen short interest decline by nearly 18% in the last month. This is likely due to institutional investors having a large position in Whirlpool stock., With that in mind seeing the 17% decline in the stock isn’t unusual.
Should Investors Buy the Dip?
Whirlpool stock looks very undervalued at this moment. The stock is trading for right around 9X earnings and has a solid dividend that begins to look stronger every day. Right now, the 2.6% dividend yield is more than double what investors can get from the 10-year Treasury bill.
Those are reasons to support long-term investors buying the stock. But what about as a short-term trade? Right now the trends are not favorable. In early July, shares were consolidating, and it was reasonable to expect a break to the upside. The opposite has occurred and the stock is trying to hold a key support level at around $210.
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