Encore Capital Group's relative strength line just hit a new high while the stock grinds through the fifth month of a bullish cup pattern. Its IBD ratings have surged to lofty levels as well, making this stock a perfect choice for today's IBD 50 Stock To Watch.
Encore is the top-performing component of the Financial Services-Specialty industry group, which has been a mixed bag for investors in 2022; it's currently ranked 64th out of 197 industry groups. The San Diego-based company purchases, collects and manages unsecured consumer credit-card receivables.
There is obvious risk in this business if the economy dips into recession, prompting a surge in credit-card defaults. However, a bad economy may also be good news for Encore profits, given their narrow specialization on debt recovery.
Encore's Excellent IBD Ratings
Encore is currently No. 3 in the IBD 50. This is a small-cap stock, with a market capitalization of just $1.52 billion. President and CEO Ashish Masih was just named a CEO of the Year by the San Diego Business Journal in the large public company category. Masih was chosen "on the strength of Encore's business performance and its caring, collaborative and inclusive culture."
The stock holds a near-pristine 98 Composite Rating and 99 EPS Rating. Earnings in the last three quarters beat expectations by healthy margins. Earnings went ballistic in the quarter ending March 31, growing to $6.40 per share (vs. $2.53 in the December-ended quarter). In addition, Encore posted impressive average EPS growth of 75.1% in the last three quarters.
Encore stock rallied to an all-time high of 72.67 in February and reversed into a cup pattern, identified by its rounded look and modest downside. Aggressive buyers stepped in after a decline to 55.04 in June, yielding six up days in higher-than-average volume. The RS line was well off the lows at that time and took off in a vertical impulse that mounted the February high this week.
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What To Watch In Coming Weeks
Encore Capital's price action broke out above the 50- and 200-day averages earlier this month, after testing those critical levels for four months. The stock is now trading about 10 points below the 72.77 buy point, but aggressive traders can watch for a pullback into the low 60s, where the moving-average breakout should generate new support.
The company will report Q2 earnings on Aug. 3 or 4. The S&P Capital IQ consensus estimate currently stands at $2 per share, lower than estimates prior to the first quarter's big beat. Another quarter of rising EPS is unlikely after the huge March number, so fiscal-year 2022 estimates of $12.85 could be the most important metric.
Also keep a close eye on the Accumulation/Distribution Rating, which now stands at a bullish A-. The recent breakout generated heavy buying interest, and this rating will tell us if traders are taking profits or holding in anticipation of larger upside.
Follow Alan Farley on Twitter @Msttrader for daily stock market action.
