1 Stock to Buy, 1 Stock to Sell This Week: Salesforce, Dollar General

Stocks on Wall Street finished sharply higher on Friday, with the Nasdaq Composite and S&P 500 both closing at their highest levels since August 2022 amid optimism over negotiations to raise the U.S. debt ceiling.

Even so, the major indices closed mixed for the week: the Nasdaq jumped 2.5%, the S&P edged up 0.3%, while the blue-chip Dow Jones Industrial Average was the laggard, falling 1%.

The holiday-shortened week ahead - which will see U.S. stock markets closed on Monday for the Memorial Day holiday - is expected to be another eventful one.

Investors will have their first chance to react to news that U.S. President Joe Biden and Republican House Speaker Kevin McCarthy reached a tentative deal on Saturday evening to suspend the federal government's $31.4 trillion debt ceiling, ending a months-long stalemate.

Meanwhile, on the economic calendar, most important will be Friday’s U.S. jobs report. Nonfarm payrolls are forecast to rise by 180,000 in May, while the unemployment rate is seen inching up to 3.5%.

The data will be key in determining the Federal Reserve’s next policy move.

Currently, financial markets are pricing in a 64.2% chance of another quarter-point increase at the next FOMC meeting on June 14, according to Investing.com’s Fed Rate Monitor Tool.

Elsewhere, some of the key earnings reports to watch in the week ahead include updates from Macy’s Inc (NYSE:M), Lululemon Athletica Inc (NASDAQ:LULU), Broadcom (NASDAQ:AVGO), Crowdstrike Holdings Inc (NASDAQ:CRWD), Okta (NASDAQ:OKTA), Zscaler (NASDAQ:ZS), C3 Ai Inc (NYSE:AI), and Chewy (NYSE:CHWY) as Wall Street’s Q1 reporting season draws to a close.

Regardless of which direction the market goes, below I highlight one stock likely to be in demand and another which could see further downside.

Remember though, my timeframe is just for the week ahead, May 29 to June 2.

Stock To Buy: Salesforce

I expect Salesforce's (NYSE:CRM) stock to outperform in the coming week, with a potential breakout to new multi-month highs on the horizon, as the enterprise software giant is forecast to deliver strong earnings and revenue when it releases first-quarter numbers after the closing bell on Wednesday, May 31.

Not surprisingly, an Investing Pro survey of analyst earnings revisions points to mounting optimism ahead of the print, with analysts growing increasingly bullish on the CRM software provider’s future prospects.

Options trading implies a 9% swing for shares after the report drops. Salesforce rallied 14% after its last earnings update on March 1.

Consensus expectations call for the San Francisco, California-based tech giant to post a profit of $1.61 a share for the April quarter. If that is in fact confirmed, it would represent year-over-year earnings growth of 64.3% amid aggressive cost-cutting measures spurred by activist investors, including Paul Singer’s Elliott Management and Dan Loeb’s Third Point.

Meanwhile, Salesforce’s revenue is anticipated to jump 10% from a year ago to $8.16 billion, reflecting strong growth across its key business segments.

In my opinion, the Marc Benioff-led company will provide an upbeat outlook for the rest of the year as it remains well-positioned to thrive despite an uncertain macro environment.

Amid soaring buzz over generative artificial intelligence, management will likely comment on the company’s generative AI for CRM, called Einstein GPT.

CRM stock closed Friday’s session at $215.44, a level not seen since April 2022. At current levels, Salesforce has a market cap of $210.9 billion, earning it the status as the most valuable cloud-based software company in the world.

Year-to-date, shares have soared 63.4%, rising alongside much of the tech sector. It should be noted that CRM stock remains extremely undervalued at the moment according to the quantitative models in Investing Pro, and could see an increase of 25.2% from Friday’s closing price.

The ‘Fair Value’ price estimate is determined according to several valuation models, including price-to-earnings ratios, price-to-sales ratios, and price-to-book multiples.

Despite a flagging valuation grade, Salesforce currently boasts a ‘Financial Health’ score of 3.0 out of 5.0 on Investing Pro thanks to its strong growth prospects and robust cash flow. That’s important as companies with health scores greater than 2.75 have outperformed the broader market by a wide margin over the past 7 years.

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Stock To Sell: Dollar General

I believe shares of Dollar General (NYSE:DG) will suffer a difficult week, with a potential breakdown to new 52-week lows, as the discount retailer will miss estimates for first-quarter earnings in my view and provide a weak outlook.

Dollar General’s Q1 financial results are due ahead of the opening bell on Thursday, June 1, and are likely to take a hit from the negative impact of a decline in customer traffic at its stores as well as rising operating expenses and higher cost pressures.

Wall Street sees the Goodlettsville, Tennessee-based discount retail chain, which operates more than 18,700 stores in the continental U.S., earning $2.39 a share in the April quarter, declining 1% from EPS of $2.41 in the year-ago period. Meanwhile, revenue is forecast to increase 8.2% annually to $9.46 billion.

Underscoring several near-term headwinds Dollar General faces amid the current environment, analysts have reduced their EPS estimates 18 times in the 90 days prior to the earnings release, compared to zero upward revisions, as per an Investing Pro survey.

Looking ahead, it is my belief that Dollar General’s management will strike a cautious tone in its forward guidance given the ongoing slowdown in demand for higher-margin items as inflation remains persistently high.

Market participants expect a sizable swing in DG shares following the update, with a possible implied move of roughly 7% in either direction, according to the options market. Dollar General fell 4.4% after its last earnings report in mid-March.

DG stock, which slumped to a one-year low of $200.80 midweek, ended at $205.10 on Friday. At current valuations, Dollar General has a market cap of $44.9 billion, making it the largest U.S. dollar store and one of the biggest discount retailers in the country.

Despite its recession-proof status, shares have lagged the year-to-date performance of the broader market by a wide margin so far in 2023, falling almost 17% since the start of the year in contrast to the S&P 500’s near 10% gain.

Dollar General, which describes its core customers as households earning less than $35,000, mostly sells groceries and consumable goods, which carry lower margins compared to discretionary items such as houseware and apparel products.

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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR S&P 500 ETF (SPY (NYSE:SPY)), and the Invesco QQQ Trust ETF (NASDAQ:QQQ). I am also long on the Technology Select Sector SPDR ETF (NYSE:XLK). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.