Is it Time to Fade the Rally in Generac Stock? Generac stock has had a good run and there may be better days ahead. But now may be the time to take profit and look for a better entry point...

Generac Holdings, Inc. (NYSE: GNRC) stock is up 7% the day after it posted mixed fourth-quarter and full-year earnings on February 15. But the stock is down 4% from the post-earnings rally that briefly took shares above $140 per share.

The rally has to be a relief to shareholders who have had to endure a 58% loss in the stock over the past 12 months. And GNRC stock is up 33% in 2023. So how should investors approach these results?

The Bullish Case: The Channels Will Clear Up

Generac saw revenue grow on a year-over-year basis in 2022. But the same can't be said of earnings which were down YOY for the second consecutive quarter. The weakness in the housing market can explain some of that. However, commercial sales in the quarter were up in the quarter, which is helping offset weakness in the housing sector.

Management's outlook believes that mortgage rates may stabilize and that could lead to a recovery in the housing market in the second half of the year. Still, the company continues to work through oversupplied inventory. To offset that, Generac is starting to increase the number of dealers.

GNRC stock is trading at a P/E ratio of around 19x earnings, the stock is priced fairly to the market and its profit margins are still healthy. And since the earnings report, one analyst has upgraded the stock from Neutral to Buy and two other analysts boosted their price targets for Generac. Overall, the analysts surveyed by MarketBeat rate Generac as a Moderate Buy with a price target of $231.29. That would be a gain of over 77%.

The Bearish Rebuttal: Hope Won't Fix an Ailing Economy

A red-hot PPI reading on top of an elevated CPI reading virtually ensures that the Fed is not done raising rates. Employment seems to be the last leg of the stool, propping the economy up. If that leg goes, it's hard to see the housing market making a meaningful recovery.

Since Generac relies on that sector for 60% of its business, it's hard to overstate the importance of that recovery to investors.

Earnings Will Tell the Tale

Generac's full-year earnings per share were lower in 2022 than in 2021. And they're expected to go lower still in 2023. The broader market is always forward-looking, so, understandably, investors are pricing in lower earnings to GNRC stock.

But even with that, the sell-off looks a little overdone. The stock is trading at ranges seen in the summer of 2020 despite earnings per share being significantly higher. And if Generac management is correct, the company may deliver an earnings surprise in 2023. But even the company says that much of its growth is expected to come in the second half of 2023.

As of this writing, GNRC stock is testing a level of support at $130. It may be able to hold that level, but the bears seem to be in control. If the stock can't hold that level, then $125 and even $120 come back into play. It's been a good run, and there may be better days ahead. But now may be the time to profit from GNRC stock and look for a better entry point later this year.