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3 Things to Watch in the Stock Market This Week

By Demitri Kalogeropoulos – Dec 21, 2020 at 7:10AM

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Paychex is one of several big companies set to report earnings results in the trading week ahead.

Stocks rose last week, as the Dow Jones Industrial Average (^DJI) and the S&P 500 (^GSPC) each added to year-to-date gains. The Dow is entering the final full trading week of 2020 up 6% while the S&P 500 has gained almost 15%.

A few widely owned stocks will announce operating results over the next few trading days, including CarMax (KMX), Paychex (PAYX), and Cintas (CTAS). Let's take a look at the key trends that might send their stocks moving this week.

^SPX Chart

^SPX data by YCharts

CarMax's gross profit

CarMax reveals its latest growth trends on Tuesday, and investors are conflicted about what to expect from the report. The used-car retailer announced surprisingly strong sales, profit margins, and earnings in its last quarterly outing. But executives warned about a potentially rocky period ahead for the business. The demand rebound might be threatened by further COVID-19 outbreaks, elevated unemployment, or price cuts from new-car manufacturers.

Most investors who follow the stock are looking for healthy sales and earnings gains this week. Odds are good that CarMax will maintain a robust profit margin per vehicle, too, as it routinely books at least $2,200 of gross profit on each used-car sale.

A couple shops for a car.

Image source: Getty Images.

Look for CEO Bill Nash and his team to highlight their progress at building out the online selling platform that just became available nationwide this year. CarMax should also update investors on the success of its new advertising program, which began in Q3 and should run through the end of 2020.

Paychex's client base

Paychex's stock has been trailing the market for most of the year, but the company has an opportunity to change that narrative with its earnings results on Wednesday. The software-as-a-service specialist noted some lingering pressure from COVID-19 in its last report, with sales falling 6% and adjusted operating income declining 10%. At the time, CEO Martin Mucci said management was happy with the pace of demand recovery. But investors are still hoping to see improvements in areas such as client gains and average contract size.

Paychex predicted back in late October that total revenue will decline by between 2% and 4% this quarter, to mark another step forward following last quarter's 6% drop. Investors are hoping that improving economic trends will contribute to a similarly upbeat outlook on Wednesday that might imply a return to overall growth in late 2020 and early 2021.

Cintas' outlook

Cintas' business has been rebounding since the lifting of retailing restrictions that began in the spring. But the uniform provider still endured declining sales in the quarter that ended on Aug. 31.

Most investors are expecting that general trend to continue in Tuesday's announcement. Sales should fall, but earnings might again rise thanks to aggressive cost-cutting by CEO Scott Farmer and his team.

Meanwhile, executives said in late September that the pandemic had hobbled their ability to project sales trends deeper into fiscal 2021. Three more months of demand data, plus conversations with the businesses Cintas serves, might allow for a more detailed growth projection from the company this week.

While Cintas isn't likely to predict surging gains in organic sales, investors can reasonably expect to hear evidence of a continuing rebound, plus the prospect for further gains in financial metrics such as cash flow and operating earnings.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends CarMax and Cintas. The Motley Fool has a disclosure policy.

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