One of the goals of long-term investing is to buy companies that you don't have to constantly check to be sure they are making the right decisions. That said, companies do go through periods where a little more attention should be paid.
So we asked three of our contributors each to highlight a stock they will be paying particular attention to this coming quarter. Here's why they are interested in what Caterpillar (NYSE:CAT), First Solar (NASDAQ:FSLR), and Tractor Supply (NASDAQ:TSCO) have to say.
Digging up value with Caterpillar?
Daniel Miller (Caterpillar): After a nosediving stock price during the Great Recession, Caterpillar managed to crawl out of the hole before revenue peaked around 2012 and then slowly declined. But it's difficult to get a feel for where Caterpillar should be trading now, especially because the stock price has rebounded consistently since 2016 despite a lack of revenue growth. That makes 2017, especially the first half of the year, pretty interesting for investors who'd like to own shares of Caterpillar.
In terms of potential positive developments, Caterpillar believes commodity prices will be higher than a year ago, with consistent improvement and more stability. It also believes construction in China will remain positive, albeit dependent on government support for incremental growth. Management has been diligent about cutting costs by closing or consolidating more than 30 facilities, reducing floor space, and slashing its workforce -- that's helped lower Caterpillar's period and variable costs by $2.3 billion during 2016, compared to the prior year.
On the flip side, mining customers are expected to keep their capital expenditures flat this year with a better chance to increase spending in 2018, which would be positive for Caterpillar's equipment sales. Caterpillar has seen slight weakness in North American construction and new-equipment sales in 2016. Also, the implications of Brexit for economic growth in Europe still need to be hashed out, which adds to the uncertainty in the business environment.
Ultimately, while Caterpillar has become a much leaner company and still has long-term competitive advantages, with the outlook remaining dim over the near term, it's easy for investors to question whether the stock price rally over the past year can be sustained during the first half of 2017. It's definitely a stock to keep an eye on.
Will First Solar's strategy shift be as costly as Wall Street thinks?
Tyler Crowe (First Solar): The past year has not been kind to shares of First Solar. After a great 2015 and 2016 -- when developers thought several tax credits would expire at the end of 2016 -- demand for panels has waned a bit and panel prices have slumped as a result. This price slump isn't necessarily part of the continuous decline in solar-power prices, but is a sign of oversupply in the market. As a result, operating margins for panel producers have contracted considerably over the past several quarters, and shares of First Solar have been hit hard:
For some of the more indebted producers, a lower-margin environment could pose a short-term existential threat. For First Solar and its $1.7 billion in net cash on the books, this seems like less of an issue. It has more than enough resources to get through this cyclical trough and keep investing heavily in building out manufacturing capacity for its new Series 6 panels. Management considers these new panels to be a transformative product. So much so, in fact, that the company completely scrapped its Series 5 production plans and accelerated the development of Series 6.
The thing is, consumers aren't exactly going to line up for First Solar's older panels if the company is building these new panels. So it will be worth watching to see if the company's 2017 results struggle as much as its share price suggests, while it converts and ramps up its manufacturing facilities to produce Series 6. There is clearly lots of cash on hand to make this transformation now. The question is how much the company will burn in the process.
A retailer with rebound potential
Rich Duprey (Tractor Supply): Rural retailer Tractor Supply just got put out to pasture after warning that first-quarter earnings would be coming in below analyst expectations. Although sales were in line with forecasts, comparable-store sales are down 2.2% from last year. This figure marked a drastic change of pace from last year's same-store-sales result, which came in at 4.9%. The tough comparison, coupled with deflation and poor weather in the North that hit demand for seasonal products, made for a difficult period.
It seems similar to the plowing-under it endured after its third-quarter results last year also failed to germinate, but then it came back with a fourth-quarter report that surprised everyone with its strength. Management didn't indicate that this year's second quarter would similarly outperform, but it does believe business will get back on track. CEO Greg Sandfort said in the release announcing the business update, "We believe seasonal merchandise sales will improve as we move further into the spring selling season."
Tractor Supply could be helped by a calendar shift that moved the Easter holiday from the first quarter last year to the second quarter this year. Also, comparables are all shifted forward by one week, since 2016 had 53 selling weeks instead of 52.
On the company's third-quarter earnings call last year, it noted that a quarter of its store base was located in energy-intensive states -- oil states, like Texas, and coal states, in the Appalachian region. Oil prices are around $55 a barrel now, but are in a state of flux with conflicting market signals over supplies and production levels. Strengthening prices could help Tractor Supply's sales, but it would be a while before they trickled down to the company; utility-vehicle sales, for example, will take some time to come back.
Management had warned last year it expected market softness to last about 18 months, and we're only about a third of the way through. But how Tractor Supply performs in the second quarter could give an indication of whether investors can expect that timetable to shorten or get extended.