Markets have been shrugging off bad economic data for nearly two years, as the Federal Reserve held up the promise of cutting interest rates by the end of 2024. However, that promise started as a timeline set initially for March 2024 and had been postponed due to stubborn inflation data and a hotter-than-ideal job market. That disconnection seemed to end today.
As the ISM manufacturing PMI index recorded its 21st consecutive month of contraction, the stock market experienced a two-day selloff. The following day, the employment situation report (NFP) had one of its worst readings this year. Coming to their senses, investors grew worried about the data, accelerating the potential rotation out of the technology and consumer discretionary sectors.
But it’s not all bad news. Within the PMI index, there is one industry that is still managing to put out expansion readings even in the middle of what could be the worst economic slowdown this cycle. The one stock that will benefit the most from this trend turns out to be SharkNinja Inc. (NYSE: SN), which is looking to ride the potential boom in home appliances demand.
How Lower Interest Rates Can Fuel a Rally in SharkNinja Stock
It isn’t just credit cards and other financial products that will relieve consumers; lower interest rates will also decrease mortgage rates. With an over 90% probability of a rate cut coming by September 2024, according to the CME’s FedWatch tool, investors now have a date to see a fueling rally for stocks in the real estate value chain.
U.S. home listings have gone up in expectation for a heated property market in the coming quarters. Stocks like Zillow Group Inc. (NASDAQ: Z) still command double-digit upside from analysts at J.P. Morgan Chase & Co. as they now forecast a price target for up to $61 a share on that stock, daring it to rally by 37.4% from where it trades today.
Next in the value chain, after the listing has gone through Zillow, is the furnishing of the new home. This is why new orders and production drove the furniture industry into expansion for the past two months of PMI data and also why SharkNinja stock trades at 94% of its 52-week high price today.
This bullish momentum, in the middle of bearish economic data, is something investors should keep front and center when considering adding this stock to their watchlists. But price action is not the only factor pushing the potentially bullish prospects for SharkNinja stock.
Wall Street analysts, namely those at Canaccord Genuity Group, may have caught onto this trend as well, as they now see a price target of up to $90 a share for the company. SharkNinja stock would need to rally by 19.5% from today’s prices to prove these targets right. These price targets would also mean a new all-time high for the company.
Why Markets Are Willing to Pay a Premium for SharkNinja Stock
Investors can decrypt the market's message in a few ways. First, they can examine the valuation multiples currently placed on the stock against its peers. Starting with the forward price-to-earnings (forward P/E) ratio, which attempts to value today on tomorrow's projected earnings, here's where SharkNinja stock stands.
Trading at a 17.7x forward P/E would command a premium of over 19% above the rest of the home furnishing sector, which trades at an average 14.8x valuation today. More than that, a 7.1x price-to-book (P/B) ratio will also command a premium of nearly 34% from the discretionary sector's average 5.3x valuation.
There's usually an excellent reason for stocks to trade near new highs and bid up to outlier valuations like SharkNinja. Apart from the coming interest rate cuts, one of these reasons can be found in the company's financials.
Wall Street analysts forecast up to 13.2% earnings per share (EPS) growth for the next 12 months. However bullish this may be compared to the 2.5% expected out of peers like Williams-Sonoma Inc. (NYSE: WSM), it is still conservative considering the company grew its EPS by over 25% in the past year.
Digging into SharkNinja's latest quarterly earnings press release will reveal more than just EPS growth. Revenue jumped by 24.7% over the year despite interest rates being on a hiking cycle, and gross margins saw a boost of 2.6% as well.
When investors consider where the iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) has been headed, it is pretty clear that markets are already trading like the Fed is certain to cut interest rates in September. That also gave SharkNinja management the confidence to raise their guidance further for 2024.