• 17 Aug
    MET looks like a value trap

    MET looks like a value trap

    There’s a popular saying that you might have heard in a lot of different settings outside of the stock market: “If it looks like a duck, walks like a duck, and smells like a duck…then it’s a duck.” It’s interesting to me that I haven’t heard or seen the saying used when talking about stocks, given how often I’ve heard it throughout my life in common, everyday settings. The more time I spend paying attention to the market, though, the more I think there’s a reason for that. The truth about stocks – and, quite frankly, one of the things that makes most people simply toss their hands in the air when it comes to active investing – is that very often, the reality about a stock, or the underlying company, is quite different than the perception.

    One of the dangers of value investing is that sometimes you’ll start paying attention to a stock that looks, at least at first blush, like it could be a good bargain. It might be a very well-known and respected company, and so sometimes when people realize the stock has dropped off of recent highs, they’ll automatically assume it’s a great opportunity to buy the stock cheap. This kind of situation is often called a value trap, meaning that it looks good enough to get you interested, and perhaps even to go ahead and put your hard-earned capital into it. The trap is that sometimes there are very good reasons the stock has been dropping – and the risk is that it could go even lower.



    My own investing style can put me at risk of running into these kinds of value traps. To be clear, the risks I’m talking about aren’t just about the fact the stock might already be in a long, sustained downward trend; they often aren’t readily visible unless you’re willing to open the hood and really start probing around the guts of the business. That means analyzing a lot of the company’s fundamentals and being able to accept when you see a significant amount of problematic data that can act as an early warning that there is more trouble ahead.

    I believe MetLife, Inc. (MET) is a pretty good example of what I’m talking about right now. The company has great public visibility and presence, and a strong, long-standing position of leadership in the Life & Health Insurance industry. Since the beginning of the year, the stock is also down more than 20% as of this writing, putting it in clear bear market territory, and near to its 52-week low prices right now. There are some indications of good fundamentals in place, and some basic valuation measurements like the Price/Earnings and Price/Book ratios that look attractive at first glance. If you dig a little deeper, though, you’ll find that there are also some things to be concerned about, and that should give investors ample reason to think twice before buying the stock.



    Fundamental and Value Profile

    MetLife, Inc. is a provider of life insurance, annuities, employee benefits and asset management. The Company’s segments include U.S.; Asia; Latin America; Europe, the Middle East and Africa (EMEA); MetLife Holdings, and Corporate & Other. Its U.S. segment is organized into Group Benefits, Retirement and Income Solutions and Property & Casualty businesses. Its Asia segment offers products, including life insurance; accident and health insurance, and retirement and savings products. Latin America offers products, including life insurance, and retirement and savings products. Life insurance includes universal, variable and term life products. EMEA offers products, including life insurance, accident and health insurance, retirement and savings products, and credit insurance. MET has a current market cap of about $45.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings have been flat, while revenues increased nearly 23%. In the last quarter, earnings declined by about 4.5% while revenues increased 43%. This is a pattern that I think shows the company is becoming more and more inefficient. In addition, the company’s margin profile shows that Net Income as a percentage of Revenues dropped from a little over 6% over the last twelve months to 4.2% in the last quarter. That might not sound like a big drop, but to put it in perspective, in the last quarter, 1% of Revenues equaled about $212 million. That means the company has seen its profit margin erode by roughly $425 million.
    • Free Cash Flow: MET’s free cash flow is healthy, at more than $13 billion. The warning signal about Free Cash Flow – and something that I think helps to put the erosion of Net Income/Revenues in perspective – is that it has declined from from about $19 billion over the last year.
    • Debt to Equity: MET has a debt/equity ratio of .29. This is a very manageable number, and since the company has more than twice the amount of cash (more than $34 billion) than it does long-term debt (about $15.5 billion) there is no concern about their ability to service, or even to liquidate their debt if necessary.
    • Dividend: MET’s annual divided is $1.68 per share and translates to a yield of 3.68% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MET is $54.11 and translates to a Price/Book ratio of .84 at the stock’s current price. That’s pretty attractive at first glance to value investors, who generally like to see Price/Book ratios below 1. However, the stock’s historical average Price/Book ratio is only .88, which puts a target price for the stock at only about $47.50 per share, or only about 4.2% higher than its current price. This is also where I’m seeing one of the biggest and most persuasive reasons to be concerned: the stock’s Book Value has been declining steadily for the last two years, from a high at $72.25 in mid-2016 to its current level. I read that as an erosion of the company’s intrinsic value. Warren Buffett likes to think of Book Value as a reflection of the per share amount of money a shareholder can expect to see if the company suddenly decided to pay off its debts and close up shop. Would you want to buy a stock that has seen the value of its basic business operations erode by more than twenty percent?



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend dates back to November of last year after the stock hit a 52-week high at around $56 per share. Since February of this year, the stock has hovered in a mostly sideways range between about $48.50 on the high side and $43 on the low end. That range has been narrowing since July, with resistance at around $46.50, with support looking steady at between $43 and $44 per share. At the bottom of a downward trend, a sideways range can often point to signs the stock is getting ready to rebound; however the narrowing of that range over the last month looks to me like a deterioration of the stock’s ability to sustain its current price levels.
    • Near-term Keys: The stock’s Fibonacci retracement lines are a pretty good reference point to use to look for clues that the stock could be finding some strength and might actually reverse its downward trend. Look for a break above the 38.2% retracement line at $48 as a first signal that a new upward trend is in the offing; until that happens, any kind of bullish bet on the stock is purely speculative, with a very low probability of success and not a lot of upside potential to offset the downside risk. A drop below current support at $43 could be an opportunity to look for a bearish trade, however, with a short-term target between $35 and $38 looking very possible.


  • 16 Aug
    BWA is worth a very long look

    BWA is worth a very long look

    The market has been a bit shaky this week, as concerns about emerging markets and decreasing oil demand have put investors on edge, even as U.S. economic data and earnings information continues to come in strong and healthy. The market has dropped in five of the last six days after testing the all-time high levels all three major indices set in late January of this year. Trade tensions continue to add to that sense of uncertainty. While a smart investor won’t automatically dismiss the week’s decline as just another pullback, he also won’t ignore some of the opportunities that are coming about as a result.

    The automotive industry has been coming under quite a bit of pressure, with all “Big Three” automakers down for the year, as rising oil prices have increased costs and narrowed margins, and trade tensions and tariffs on steel, aluminum and autos themselves have added to the uncertainty about the industry. That volatility has rippled to the Auto Components industry as well, with stocks like Magna International (MGA), Lear Corporation (LEA), and Borg Warner Inc. (BWA) have all reversed impressive upward trends since the beginning of the year. BWA in particular is very interesting; as of this writing, it is down about 24% since early January of this year, but has begun to show signs of consolidation in the $44 to $46 price area. Could the time be right to think about this stock as a legitimate value play? There are some very compelling reasons to believe the answer is yes.



    Fundamental and Value Profile

    BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA has a current market cap of about $9.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 23%, while revenues increased nearly 13%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues improved from a little over 5% over the last twelve months to 10% in the last quarter.
    • Free Cash Flow: BWA’s free cash flow is adequate, at $515.9 million. This number has improved significantly since the last quarter of 2015, when it dropped below $150 million, however it has also declined in each of the last two quarters from a high at the end of 2017 at about $620 million.
    • Debt to Equity: A has a debt/equity ratio of .52. This is a very manageable number, however it is also worth noting that the company has a little over $2.1 billion in debt versus a little over $361 million in cash and liquid assets as of the last quarter. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.
    • Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 1.54% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BWA is $19.41 and translates to a Price/Book ratio of 2.26 at the stock’s current price. Their historical average Price/Book ratio is 2.96, suggesting suggests the stock is currently trading at a significant discount of about 30%. That is supported by the stock Price/Cash Flow ratio, which is currently about 50% below its average. Together, these providing a very compelling reason to take this stock seriously, with a long-term price of between $57 and $66 per share. That means the stock has some very good fundamental reasons to drive back to the 52-week highs it set at the beginning of the year, and even to possibly test its all-time highs, which were reached in 2014 at around $67 per share.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since hitting its 52-week high at around $58, the stock has followed a significant downward trend that is on the verge of extending into a long-term period of time. Note, however that since the beginning of July the stock has consistently hovered between trend support around $43 and short-term resistance around $46 per share. Compared against the downward trend, that sideways pattern is called consolidation, and it suggests the stock could be building momentum to stage a significant reversal of that longer trend. A move above that top-end resistance could be taken as confirmation a new upward trend is about the start.
    • Near-term Keys: The stock is currently at the low end of its consolidation range. A move above $46 would be a very good signal to act on for a bullish trade, either by buying the stock outright or by working with call options. If the stock breaks below support at around $43, however, the current downward trend would be reconfirmed, with the stock likely to drop down to its next support level, which from historical pivots would probably be between $38 and $40 per share. That could provide an opportunity to short the stock or to start buying put options.


  • 15 Aug
    Is SAM worth its current stock price?

    Is SAM worth its current stock price?

    In the constant search for value, one of the questions that inevitably have to ask yourself as an investor includes how the stock you’re looking at is likely to behave in different economic cycles. Some stocks are highly cyclic; the energy and automotive industries are good examples of market segments that respond well in certain economic phases, but really struggle in others. One of the things that a lot of investors like to do when they think the sustainability of current economic strength could be at risk is to start looking for stocks that are less cyclic in nature. Looking for companies that should do well in any economic cycle means focusing on businesses that consumers will always need to rely on no matter what the economy is doing. These are often called defensive stocks, and they often revolve around industries like utilities, healthcare, and food, among a few others.

    Another pocket of the market that can be pretty interesting is Beverages. Since they fit into the Food category, it’s usually pretty easy to buy into the idea that Beverage companies should have a pretty stable business model, no matter what the economy’s current state may be. You can actually drill down a little further, too to mine a sub-segment, Alcoholic Beverages to tap into (pun intended) what is perhaps an ironic twist on a defensive strategy, since sales of alcoholic drinks have shown a historical tendency to remain very healthy – and even to increase somewhat – when the economy is in decline.



    The truth is that alcoholic beverage companies generally do well in bullish economic cycles, as well as in bearish ones. That is another reason that this can be an interesting segment to pay attention to; but one of the difficulties about the industry is the relatively small market presence of U.S. companies. In the case of beer, for example, 85 percent of the beer made in the United States is owned by foreign companies. How do you play the industry? One of the notable names is Boston Beer Company (SAM). You may not recognize the company name right away, because the company doesn’t fit the description of a large-cap, blue-chip stock. It’s a good bet, however that you know about their products, especially if you are a beer drinker.

    The stock is interesting, because it has been following a very strong upward trend for a little more than the past year, increasing from about $130 to its current price a little above $290 per share. That’s a 124% increase in price in a little over a year; but the stock is also down since the last week of July from a high at nearly $330 per share. That’s down about 12% in just a few weeks. The stock more recently has been showing some strength, rebounding from a short-term low at around $270 per share. Is it poised to go back up and retest its $330 highs? Maybe; the company has some interesting fundamental strengths that indicate they are very well-managed and effective at managing their business. However, there are some important value-based measurements that I think suggest the stock is actually pretty risky right now. Let’s take a look.



    Fundamental and Value Profile

    The Boston Beer Company, Inc. is a craft brewer in the United States. The Company is engaged in the business of producing and selling alcohol beverages primarily in the domestic market and in selected international markets. The Company operates through two segments: Boston Beer Company segment, and A&S Brewing Collaborative segment. The Boston Beer Company segment comprises of the Company’s Samuel Adams, Twisted Tea, Angry Orchard and Truly Spiked & Sparkling brands. The A&S Brewing Collaborative segment comprises of The Traveler Beer Company, Coney Island Brewing Company, Angel City Brewing Company and Concrete Beach Brewing Company. Both segments sell low alcohol beverages. The Company produces malt beverages and hard cider at the Company-owned breweries and under contract arrangements at other brewery locations. As of December 31, 2016, the Company sold its products to a network of approximately 350 wholesalers in the United States and to a network of distributors. SAM has a current market cap of about $2.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined almost 16%, while revenues increased a little over 3%. The picture is better in the last quarter, with earnings growth at 260% and sales growing about 43%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues is pretty consistent, at about 10% for the last quarter as well as the trailing twelve months.
    • Free Cash Flow: SAM’s free cash flow is modest, at $86 million.  This number also has declined from about $130 million in mid-2017. Liquidity is somewhat of a question, since the company reported only about $76 million in cash and liquid assets in the last quarter.
    • Debt to Equity: A has a debt/equity ratio of .0. They have carried no debt on their balance sheet since the beginning of 2017. That helps to minimize the concern about the company’s cash position as it relates to their ability to service liabilities; but it still begs the question of what ability the company has to expand its operations, and how it intends to do it.
    • Dividend: SAM does not pay a dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SAM is $37.99 and translates to a Price/Book ratio of 7.38 at the stock’s current price. Their historical average Price/Book ratio is 7.1, suggesting suggests the stock is currently trading at a slight premium – about 7.5% – to its intrinsic value. This view is supported by the fact the stock is also trading 15% above its historical Price/Cash Flow ratio. From a strictly value-based perspective, that means the stock could be at risk to drop to a low at around $245 at minimum. That would increase the stock’s drop from its all-time high at about $330 to more than 25%.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After hitting its all-time high, the stock gapped down by more than $30 overnight to its latest low support level around $273 per share. That support is also validated by the 38.2% Fibonacci retracement line. The stock is currently showing some nice positive momentum, so there could an opportunity to see the stock keep filling that late July gap; if it does keep rallying, however, look for resistance, however to show up somewhere in the $310 to $315 price range.
    • Near-term Keys: Buying volume over the last few days that the stock has been rebounding from the $273 level is significantly lower than the volume the stock has seen in the past month, which calls into question how likely the stock is to keep pushing higher. I see that as an early sign of weakness in the stock, which I believe makes the downside risk more compelling than the upside opportunity. However, a good opportunity to work the bearish side by shorting the stock or working with put options would also not have a reasonable probability of success unless the stock breaks its support as shown by the 38.2% retracement line at $259. If a drop below that level happens, the stock could easily push straight through the 50% line, all the way to the 61.8% line at around $215 per share. It is also interesting that $215 would act as the first sign of a good value play as well, since at the point the stock would be trading at a discount of roughly 20% below its historical Price/Book ratio.


  • 14 Aug
    Agilent is roughly 12% off of its all-time high; is its actual discount deeper?

    Agilent is roughly 12% off of its all-time high; is its actual discount deeper?

    When I see stocks trading at or near historical highs I almost always assume that the stock is overvalued. That’s even more true if the stock is near to an all-time high and has been following an upward trend of more than a year. With the market well into year nine of the latest long-term bullish trend, the number of stocks that fit that description is much, much higher than the number of stocks that I would normally be inclined to call undervalued.

    One of the reasons trends covering different time periods are important to recognize is that over those differing time ranges, the factors that carry the greatest weight isn’t always the same. Some trends are driven primarily by nothing more than current news, market sentiment and the ebb and flow of current momentum. That’s true of short-term trends. What I like to call intermediate-term trends – those that cover three to nine months, roughly – also reflects some of the same influences as short-term trends, but are often also dictated by other, somewhat broader factors, like industry or sector momentum. Longer trends, which generally cover a year or more, are usually influenced the most by national and global economic shifts and trends, and also by a company’s individualized fundamental strength.



    When you get the combination of a growing, healthy economy along with a fundamentally solid company with a growing business, it’s pretty normal to see that company’s stock price trading at or near historical highs. That’s because investors will recognize the company’s ability to grow their business and jump on board for the ride. That can obviously put the stock in overbought, overvalued territory at the extreme; but one of the things that can also happen in some cases is that the stock’s higher price really just reflects the increasing inAnsic value of the underlying business.

    This is an idea that lies at the heart of value investing; a company with a growing business should naturally offer greater and greater returns to stakeholders. In a private company, that usually means that the portion of profits distributed to those stakeholders should grow each year that the business grows. In a publicly traded company, the most tangible way that growth gets back to stakeholders is by an increase in the stock’s trading price. This also implies that sometimes, a stock may be trading at or relatively close to historical or even all-time highs; but if the business is strong enough, it could actually still be undervalued.

    Agilent Technologies, Inc. (A) is a company that could fit this description right now. This is a stock that has been following the market’s broad upward trend since 2009 to all-time high levels; in 2009 it was trading at around $8 per share, but at the end of January was pushing to a high price around $75 per share. It’s trading at around $66 now, which means that it’s about 12% below that January high. That isn’t usually a big enough discount to make me take the stock very seriously; but a dive into the stock’s fundamentals reveals a company with an excellent pattern of growth. That is a strong validation of the stock’s extended upward trend, but there is also an interesting case to make that the stock could drive to even higher levels than the $75 peak it reached in January. That should make the stock something to watch for any value-oriented investor.



    Fundamental and Value Profile

    Agilent Technologies, Inc. (A) provides application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow. The Company serves the life sciences, diagnostics and applied chemical markets. It has three business segments: life sciences and applied markets business, diagnostics and genomics business, and Agilent CrossLab business. Its life sciences and applied markets business segment offers instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Its diagnostics and genomics business segment includes the reagent partnership, pathology, companion diagnostics, genomics and the nucleic acid solutions businesses. Its Agilent CrossLab business segment spans the entire lab with its consumables and services portfolio. A has a current market cap of about $21.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing 12% and sales by about 9.5%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile improved in the last quarter compared to the trailing twelve months, from a little over 5% (TTM) to nearly 17% (quarter).
    • Free Cash Flow: A’s free cash flow is healthy, at $825 million.  Free Cash Flow has also increased steadily since the second quarter of 2015 from a little over $200 million. The company also has excellent liquidity, with more than $3 billion in cash and liquid assets.
    • Debt to Equity: A has a debt/equity ratio of .39. This is very low and manageable. Even more to the point, the company’s cash is more than $1.2 billion higher than their total long-term debt, with healthy margins to keep their liquidity high even as they service their debt.
    • Dividend: A pays an annual dividend of $.60 per share, which translates to a yield of a little less than 1% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for A is $14.43 and translates to a Price/Book ratio of 4.56 at the stock’s current price. Their historical average Price/Book ratio is 3.5, suggesting suggests the stock is trading at a significant premium right now; however compared to their industry average, with is more than 7.0, the stock is trading at a significant discount. It is also trading 20% below its historical Price/Cash Flow ratio. Those two elements together provide an interesting basis for a long-term target price around $80, which would mark a brand new all-time high, or possibly even higher.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. At the beginning of July, the stock found intermediate trend support around $60 per share and has been showing some upward strength and momentum from that point. The stock has immediate resistance around $68 per share, but a break above that level would confirm that short-term upward trend’s strength and could start to push that trend into an intermediate time period. The stock should have support in the $63 area from the 38.2% retracement line, with support in the $59 to $60 sitting as a critical test of the intermediate downward trend’s strength.
    • Near-term Keys: If the stock breaks above $68, there could be a nice opportunity to either go ahead and buy the stock outright or start working with call options. A conservative approach could be start with a smaller than normal position size with a $75 target in mind; if the stock reaches that point, but continues to show strong bullish strength you could consider adding to the position at that point. If the stock breaks below $63, you should avoid any kind of bullish position. A drop below $59 would signal a confirmation and likely extension of the current downward trend to a long-term time frame and could provide an opportunity to short the stock or start using put options, with $55 as a short-term target, and $47 after that if you’re willing to ride the trend even lower.


  • 13 Aug
    RCL is setting up for a 20% rebound – but it could be even bigger

    RCL is setting up for a 20% rebound – but it could be even bigger

    Among the best-performing segments in the market throughout the course of 2018 is the Consumer Discretionary sector. Since the beginning of the year, as measured by the iShares Consumer Discretionary ETF (XLY), the sector is up 12.5%. That includes a pullback of about 9.6% that coincided with the broader market’s correction in late January. The sector has recovered nicely from that point, closing on Friday just a little below an all-time high. The sector’s strong long-term trend, which extends all the way back to 2009, does imply that most stocks in the sector should be seriously over-valued; but one pocket of the sector that actually looks pretty good from a valuation standpoint right now is Leisure & Recreation Services. In particular, Royal Caribbean Cruises Ltd (RCL), which performed remarkably well until January, but hasn’t seen the same kind of push to new all-time highs since then, actually looks undervalued right now. The stock is about 20% below its all-time high price around $136 as of this writing, but looks like it could be setting up nicely, from both a value-based and technical view, for a big push higher.

    As the economy continues to show strength, consumer discretionary stocks like RCL could be particularly well-positioned. The stock has an interesting tendency to perform especially well following the summer season; it would seem to be a delayed reaction to increased consumer spending and vacation planning during the summer months. That bodes well for the stock’s short-term performance if you aren’t particularly interested in a longer-term play; but if you don’t mind taking a patient approach, I think there is a much bigger opportunity lying in wait. There are risks, of course; one of the drivers for the stock over the last couple of years has been relatively affordable fuel costs. An increase in oil prices would have a direct effect on RCL’s bottom line. If some analysts fears about oil supply in the wake of renewed U.S. sanctions against Iran are correct, that risk could show up sooner than later. Trade tensions, and the impact they could have on the global economy, could also present a longer-term risk. These are factors that you should take into account against the value and technical information I’m about to present, which looks very favorable.



    Fundamental and Value Profile

    Royal Caribbean Cruises Ltd. (RCL) is a cruise company. The Company owns and operates three global cruise brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises (Global Brands). The Company also own joint venture interest in the German brand TUI Cruises, interest in the Spanish brand Pullmantur and interest in the Chinese brand SkySea Cruises (collectively, Partner Brands). Together, its Global Brands and its Partner Brands operate a combined total of 50 ships in the cruise vacation industry with an aggregate capacity of approximately 123,270 berths as of December 31, 2016. As of July 31, 2018, the Company’s ships offer a selection of itineraries that call on approximately 540 destinations in 105 countries, covering all seven continents. Royal Caribbean International offers a range of itineraries to the destinations, including Alaska, Asia, Australia, Canada, the Caribbean, the Panama Canal and New Zealand with cruise lengths that range from 2 to 24 nights. RCL has a current market cap of about $23.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing nearly 33% and sales by about 6.5%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company also operates with a very healthy margin profile, with Net Income running at nearly 20% of Revenues on both a yearly and quarterly basis.
    • Free Cash Flow: TRI’s free cash flow is adequate, at $641.39 million. Their total cash and liquid assets in the last quarter was somewhat minimal, at about $109 million. I believe this is a reflection, at least in part, of a deal that was announced in June that the company would acquire a 66.7% majority stake in ultra-luxury line Silverseas Cruises, which is being financed by debt.
    • Debt to Equity: TRI has a debt/equity ratio of .68. Their balance sheet indicates their operating profits are more than adequate to repay their debt.
    • Dividend: TRI pays an annual dividend of $2.40 per share, which translates to a yield of about 2.11% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TRI is $51.56 and translates to a Price/Book ratio of 2.20 at the stock’s current price. Their historical average Price/Book ratio is 4.06. That suggests the stock is trading at a significant discount right now, with a target price north of $200. I’m not quite that optimistic, since the stock’s all-time high price was reached in January of this year at about $136 per share. However, the stock is current trading about 39% below its historical average, which provides a somewhat more conservative target price in the $158 range. While I would need to see the stock actually break $136 before I would be willing to suggest the stock could reach that level, I do think that both ratios together offer more than enough to reason to argue the stock has a good reason to drive back higher to test that all-time high. That’s a bargain opportunity of 20% alone, which is more than enough reason for a value investor to sit up and take notice.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock bounced off of trend support at around $101 in early June to push up to its current price. Its initial rebound off of the trend low saw the stock quickly push to around $114 per share before it retested that support in July; that second bounce higher is now providing a nice “double bottom” pattern to look at. Double bottoms are strong technical indicators that a stock is setting for a big bullish push, and is another reason I can see the stock rallying to retest its all-time highs around $136. The breakout that confirms a Double Bottom signal comes when the stock breaks the resistance marked by the most recent pivot high, which was reached in mid-June at around $114 per share, which the stock looks poised to do with any kind of bullish push this week.
    • Near-term Keys: If the stock breaks above $114, there could be a nice opportunity to either go ahead and buy the stock outright to hold with a $136 price target in mind if you want to take the long-term, value-oriented approach. If you’re thinking more about a shorter-term trade, there could also be a nice short-term opportunity signaled by that bullish break using call options, with a target price around the $118 – $119 level marked by the 50% Fibonacci retracement line. A bearish trade, either by shorting the stock or using put options, is a very low probability trade right now. The stock would really need to break down below its June low around $101 before any kind of bearish trade should be considered.


  • 10 Aug
    TRI: short-term bullish strength, interesting value potential. How should you play it?

    TRI: short-term bullish strength, interesting value potential. How should you play it?

    The search for bargains in the stock market is an ongoing challenge for any investor. Sometimes the challenge is harder than at other times; when the market is at or near historical highs, as it is right now for example, finding stocks that offer a legitimate value at their current price takes a little more work and effort. It also often means going against the grain of the broader market, since the best values are usually found in stocks that are trading at or near historical lows.

    Thomson Reuters Corp (TRI) is a stock that offers a somewhat different profile. As of this writing, the stock is only about $6, or 12.5% below its all-time high price at around $48 per share, but still well above its 52-week low price, which is around $34 per share. That certainly puts the stock in correction territory; but perhaps not yet at quite the level a strict value investor might generally look for to believe the stock is deeply discounted enough to warrant a more serious look. I think there are some really interesting elements to look at, however, that at least make TRI a stock that long-term investors should be putting on their watchlists; you may even decide that the stock is worth a serious look as a good value investment right now.

    Thomson Reuters is a multinational company, based in Toronto, Ontario, Canada that has been in existence since the 1850’s. The company deals in news and information services, including financial market, legal, and tax and accounting data. As you’ll see below, the company is a cash flow machine, with healthy operating profits, manageable debt, and a global footprint. Their latest quarterly earnings report was two days ago, and along with a generally positive financial report, also disclosed that they expect to complete a sale of a 55% stake in their Financial & Risk unit – the segment of their business that provides data and news primarily to financial customers, including brokerages and investment banks – to private equity firm Blackstone Group LP for $20 billion. A portion of those proceeds will be used to pursue expansion opportunities in their legal and accounting businesses.



    Fundamental and Value Profile

    Thomson Reuters Corp (Thomson Reuters) is a Canada-based provider of news and information for professional markets. The Company is organized in three business units: Financial & Risk, Legal, and Tax & Accounting. The Financial & Risk unit is a provider of critical news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals. The Legal unit is a provider of critical online and print information, decision tools, software and services that support legal, investigation, business and government professionals around the world. The Tax & Accounting unit is a provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government. The Company also operates Reuters, Global Growth Organization (GGO) and Enterprise Technology & Operations (ET&O). Thomson Reuters operates in over 100 countries. TRI’s current market cap is $29.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and revenues both declined. This is a trend that has been typical of companies in the Capital Markets industry, and TRI’s performance was better than the industry average. TRI operates with a healthy margin profile, however, with Net Income a little more than 14% of Revenues over the last twelve months. This number also improved to nearly 50% in the most recent quarter.
    • Free Cash Flow: TRI’s free cash flow is very healthy, at $1.9 billion at the end of the first quarter of the year. This number also increased dramatically from the beginning of the year, at around $1.1 billion, but declined about $25 million in the second quarter. The decline was attributed primarily to costs related to the Blackstone transaction.
    • Debt to Equity: TRI has a debt/equity ratio of .40. Their balance sheet indicates their operating profits are more than adequate to repay their debt. The Blackstone sale, which should be completed by the end of the year will infuse even more cash (about $500 million in the last quarter) onto their balance sheet. Besides financing acquisitions as already observed, it will also give them the flexibility, if they choose to do so, to practically wipe out their long-term debt, which amounted to a little less than $5 billion.
    • Dividend: TRI pays an annual dividend of $1.38 per share, which translates to a yield of about 3.28% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TRI is $18.86 and translates to a Price/Book ratio of 2.22 at the stock’s current price. Their historical average Price/Book ratio is 2.28. That suggests the stock is fairly valued right now, which at first blush doesn’t imply a “screaming deal for a value-oriented investor. However, the Price/Cash Flow suggests a little different story, since it is trading almost 20% below its historical average.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock bounced off of trend support at around $36.50 to push up to its current price. Along the way, it has shown an almost picture-perfect, upward “stair step” pattern to establish its short-term upward trend. The stock has seen resistance around $42.50, which coincides with the 50% retracement line. A break above that level could see the stock push quickly to $44, with its 52-week high in the $48 range not far off from that point. The 38.2% retracement line, which is sitting at around $41, should act as a strong support level if the short-term trend has any chance of extending into an intermediate time period. A break below that level could see the stock drop back to its 52-week lows around $36 per share.
    • Near-term Keys: If you prefer to wait for a more cut-and-dried value proposition on this stock, it might be safer to wait and see if the stock can reverse its short-term upward trend and push near to its yearly lows, or even to extend them a little more; that would put the stock’s Price/Book ratio significantly below its historical average and make the value argument more compelling than it may be today. If its bullish momentum, continues and the stock pushes above $42.50, a good short-term momentum trade could lie in buying call options, or the stock outright, with a short-term target price around $44 or $45 per share. If the stock breaks down, and you want to work with the bearish side, a good put option or short selling set up would come below $41, with a target price at around $36 per share.


  • 09 Aug
    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    In late July, and just before they released their latest quarterly earnings report, I wrote about Western Digital Corporation (WDC) and the fact that the stock had dropped more than 28% below its all-time high at around $108. The stock was around $75 per share then, and following their earnings report, the stock plunged even more; as of this writing the stock is just a little above $66 per share. At the end of July, I thought the stock was a nice buy; after reviewing the stock’s latest earnings information, and taking the latest drop into account, I think it’s an even bigger bargain now.

    So what’s been driving the latest plunge (almost 11.5% since my last post about this stock)? Sometimes, the stock market makes sense – or at least, you can tie what a stock is doing at a given time to specific news, or to something about the underlying company that has some semblance of logic to it. Often, though, it’s downright maddening. I’ll admit that when I first saw WDC drop below $70 I struggled to tie it to anything concrete. I’ve kept digging, and while I think I’ve found a couple of threads to tie the decline to, the logic behind one of them makes me shake my head.



    Shortly after my post, WDC published its latest quarterly earnings report. The numbers were good across the board – every fundamental measurement I use in my analysis remained very healthy or improved, including the company’s Book Value. It was right after that report, however that the stock started to drop. At the same time, WDC’s only real competitor in the HDD space, Seagate Technology Plc (STX) released their own earnings report. STX’s report reflected a reality that seems to be scaring investors about either company, because sales of HDD drives continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed. And while STX is focusing more and more on the only market where HDD sales remain healthy – the enterprise, cloud server storage space – they don’t have a plan to evolve their business beyond that. WDC, at least in part, looks like a victim by association of STX’s poor report, which also prompted downgrades on that stock from analysts. That’s the part that makes me scratch my head, because anybody that thinks STX is in a better position than WDC to stay relevant has to be smoking something.

    The other thread I’ve found, and that the market seems to be teeing off on, is the fact that competition in the SDD and NAND space – memory types that are built on solid-state technology, and a major piece of WDC’s evolution strategy – is intensifying. WDC bought SanDisk in 2016 primarily because they knew that staying pat with HDD technology was a loser’s game; acquiring SanDisk immediately put them at the front of the SSD and NAND chip pack. There is market data that suggests supply of SSD and NAND chips is higher than demand right now. With more companies like Micron Technology (MU), Intel Corporation (INTC) and others making forays into the space, it isn’t a given WDC will maintain their leadership position in this segment. Intensifying competition, along with high supply clearly is also playing a role right now in the stock’s decline.

    Competition in any business segment is a normal thing, and while that increases the pressure on any company, a good management team doesn’t shy away from it. I really like WDC’s strategy, and I think that in the long run they’re doing the right things to keep their business growing. Their fundamentals remain excellent in the meantime, which really means that if the stock was a nice buy at $75, it’s a great buy now.



    Fundamental and Value Profile

    Western Digital Corporation (WDC) is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company develops and manufactures a portion of the recording heads and magnetic media used in its hard drive products. WDC’s current market cap is $19.9 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 29% while revenue growth was modest, posting an increase of almost 6%. WDC operates with a narrow margin profile of about 1%. By comparison, STX’s margins are around 10%. I believe the difference is a reflection of the company’s differing approach to growth; STX focuses almost exclusively on the higher margin aspect of increasing enterprise demand, while WDC takes a two-tiered approach by meeting enterprise demand for HDD drives while also pushing hard on innovation and evolution with SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at almost $3.4 billion. That translates to a free cash flow yield of almost 17%, which is much higher than I would normally expect given the company’s narrow operating margins.
    • Debt to Equity: WDC has a debt/equity ratio of .95. That number declined from a little above 1 two quarters ago, as long-term debt dropped by more than $1 billion. Their balance sheet indicates their operating profits are more than adequate to repay their debt, and with almost $5 billion in cash and liquid reserves, the company has excellent financial flexibility, which they plan to use to pay down debt, repurchase their shares and consider other strategic acquisitions.
    • Dividend: WDC pays an annual dividend of $2.00 per share, which translates to a yield of about 3% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WDC is $38.53 and translates to a Price/Book ratio of 1.7 at the stock’s current price. Their historical average Price/Book ratio is 2.12. That suggest the stock is trading right now at a discount of a little over 19%, which is attractive; to support that opinion, the industry average is 4.6. That suggests the stock could be even more significantly undervalued right now. Using a long-term target price above $140 is probably over-optimistic since the stock’s highest price was reached in late 2014 around $110; however if the company’s evolution strategy is correct, as I expect it to be, that historical high is useful.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock broke below strong support from repeated low pivots since late last year at $75, which has really driven the stock’s bearish momentum. The Fibonacci analysis shown on the chart above makes it hard to see where the stock’s next support level is likely to be. The upward trend that ended in March actually began in March 2016 at a low of around $35 per share; applying the same Fibonacci calculations to that trend puts the 61.8% retracement level at around $62.50, meaning that the stock is nearing the next important support area.
    • Near-term Keys: The stock is already offering a significantly discounted price relative to where I think it’s long-term potential lies. The truth is that if you went long on this stock in late July, you’re probably trying to decide what to do to manage the position now. I think there is more than adequate argument to hold on and ride out the stock’s current downward trend; but if you want to limit your risk, using a stop loss 25% below your purchase price would be a smart, conservative approach. If you’re thinking about trying to short the stock or start working with put options to take advantage of downside, the best signal for that kind of trade came at the end of July, so that opportunity has come and gone. The next signal for a bearish trade would come if the stock continues to break down and drops below $62. That could see the stock drop another $10 lower to around $51 or $52.


  • 08 Aug
    The S&P 500 is about to hit a new all-time high. How much upside can you expect?

    The S&P 500 is about to hit a new all-time high. How much upside can you expect?

    Since the beginning of July, the market has shown quite a bit of bullish momentum. As of this writing, the S&P 500 (SPY) has rallied more than 150 points from a pivot low in late June in the 2,700 area – a total gain in a little over a month of 9%. The index is now poised to match, and quite possibly exceed the highs it reached in late January. For most technical traders, a new high marks a break above resistance that should give the market momentum to keep pushing even higher. If you’re not the type of person, however to simply “leap before you look,” then like me, you want to try to figure out how much room is left.

    How much upside remains in the market isn’t an easy question to answer, simply because nobody can make anything more than a semi-educated guess about future events – or the way the investing world will interpret them. The same technical traders who look for new all-time highs to extend trends even further also like to use historical price action to come up with estimates. Economists and fundamental investors try to use geopolitical and macroeconomic data and events to identify keys and trends. I hesitate to say that any one approach is better than another. Instead, I like to consider a combination of a couple of different technical techniques, along with economic and, yes, even geopolitical conditions to try to come to my own opinion.

    I spent some time this morning going over some of that data, and here’s what my early conclusions are. Keep in mind, these are just a few of my own best attempts to make a semi-educated guess, so you can take it or leave it as you wish.



    Some Fuzzy Math

    I’ll start by giving you a look at a technical chart of the S&P 500.

     

    There are a couple of elements of this chart that I think are useful right now. The first is the Relative Strength (RSI) indicator shown in the lower portion of the chart. RSI is a sentiment and momentum indicator that oscillates between upper and lower extremes to gauge a trend’s strength and give traders a way to estimate the likelihood the trend will continue or reverse. At the upper extremes (above 70), reversal risk to the downside is increased, while at the lower extremes (below 30), the opposite is true. The other element that comes into play about RSI is that stocks will often continue to follow their current trend even as RSI hovers near, or even beyond extreme levels. That reality is what makes RSI interesting to me right now. Even as the S&P 500 is pushing near to the all-time high it set in January of this year, RSI remains just a little below its uppermost extreme. It has also managed to oscillate within its upper and lower extremes since that high was reached in January, with its general pattern of highs and lows since April closely approximating the pattern of the index. That is a confirmation of the market’s trend over the last four months, and the fact that the indicator still hasn’t pierced its upper extreme band suggests there could be more room to run.

    At this point, it’s worth taking a moment to discuss a basic tenet of trend-based analysis. Trends tend to move in what I like to think of as stages. Typically speaking, most long-term trends can be broken into three different stages. Stage 1 is the earliest portion of a trend, when the market begins to reverse from an extreme or high or low. That’s the hardest stage to recognize, simply because it moves against the grain of the current longer trend, when most people will simply see that counter move as a minor correction or pullback within that trend. Stage 2 is the longest portion of a trend, and the area where the most money is likely to be made. It’s where the new trend is easiest to identify, and so more and more investors jump on board in that direction, making it easier and simpler to maintain. Stage 3 is the latest stage of the trend, and what I like of as the “last gasp” stage of that long-term trend. There is often still quite a bit of room to move along the trend in this stage, and so this stage can still yield very profitable results; but it also means that reversal risk is greatly heightened during this stage.



    The challenge about the stages of a trend is predicting how long any given stage will last. Stage 2 can last 4 to 5 years in many cases, while Stages 1 and 3 are usually considerably shorter. The problem is that word – usually. I’ve been saying the market is in Stage 3 of its long-term upward trend for more than two years, which is undoubtedly longer than that stage should last. I maintain that attitude, however, simply because I think it is smarter to estimate conservatively; plan for the best, but be prepared for the worst. That means that I want to recognize and take advantage of upside opportunity when it’s there, but be ready and positioned to react quickly and effectively when the market reverses back the other way.

    If you operate on the idea that the market is in Stage 3, any upside that remains should be somewhat limited. That is where the “291.78 Total Distance” estimate I highlighted on the chart comes into play. Some people will take the total distance of the last market correction to estimate how far the market’s new opportunity will be after a new high is reached. I think it’s reasonable to use the total distance as a reference point, but I prefer to think in somewhat more conservative terms.

    Another technical method of market analysis that I have learned to appreciate over the course of my years in the market is Fibonacci analysis. It’s pretty fascinating to see how market trends, and their swings from high to low correspond with Fibonacci mathematics. Those calculations can also be used to estimate a market’s extension of a trend. Here’s what we get if we apply the .618 Fibonacci ratio to the total distance of the market’s correction from January to April of this year:

    291.78 X .618 = 180.32

    We can add this number (roughly 62% of the total size of the correction) to the last market high to get an estimate of how much further the market could run if the resistance from that high is broken.

    2,872.87 + 180.32 = 3,052.87

    180.32 / 2,872.87 = 6.27% total upside

    Forecasting broad market upside of about 6% if the market makes a new high seems like a pretty conservative estimate; if it is even remotely close to correct, that should translate to some pretty healthy gains on individual stocks. How long that kind of a run will take is anybody’s guess. I decided to look back at the last two bull markets to gauge how long Stage 3 of their respective long-term trends lasted.



    The bull market that ran from 2002 to 2007 hit a high point in October 2007 before beginning its reversal; the “last gasp”, final stage of that five-year trend began in August, meaning that Stage 3 in that case covered about a two-month period of time. Prior to that, the March 2000 high that marked the end of the “dot-com boom” started its “last gasp” push in February of the same year. Saying the market could move about 6% in one to two months isn’t unreasonable given the increased level of volatility we’ve seen from the market this year; but I also think it’s useful to think about how long it has taken the market to recover from its latest correction (assuming, of course, that a new high is actually made). The bottom came in April, so a conservative estimate could suggest that it may take between 2 to 4 months. That certainly implies the market’s trend could last through the rest of the year, or possibly even longer since my estimate intentionally errs on the conservative side.

    There are some important elements from a fundamental and economic view that I think support the idea the market has some room and reason to run a little longer. Earnings continue to come in generally strong, and most economic reports (jobs, housing etc.) are also showing pretty broad-based strength. A healthy economy should generally lend itself well to continued strength in the stock market. While interest rates are rising, the Fed has maintained a conservative pace and degree of those increases, and the economy seems to following that lead pretty well. As they currently stand, interest rates remain historically low despite the increases we’ve seen so far. That is also a positive, bullish indicator.



    There are risks to my forecast. Frankly, many come from the geopolitical arena at this stage. Trade war concerns are still on everybody’s mind, and the Trump administration’s reimposition of economic sanctions on Iran could put a cap on oil supply that could drive oil prices near to their historical highs. While corporate earnings have yet to really show a negative impact from tariffs between the U.S. and its trading partners, more and more CEO’s are starting to cite tariffs as a risk. If that risk starts to manifest itself in an actual deterioration of revenues, and of earnings, the market can be expected to react negatively. Increased oil prices, at the extreme, could have the net effect of muting demand for a wide range of goods all over the globe. Real estate prices in many parts of the U.S. have also been showing some remarkable increases over the last year or so as well, while wage gains have generally been quite muted; at some point, those increases, along with increasing interest rates could very well put home ownership – a big indicator of broad economic strength – out of the reach of the average working person.

    Is there good upside left in the market? I think there is. I also think we have to be careful to factor risk into our evaluation and our investment decisions. Be conservative and selective about how you jump into a new opportunity, and plan ahead about how long you intend to stay or how much gain you want to chase. Put a plan in place to limit your downside risk if you’re proven wrong and the market turns against you, and limit the size of the new positions you take.


  • 07 Aug
    KR is still a screaming buy despite its recent rally

    KR is still a screaming buy despite its recent rally

    Two months ago, I wrote about The Kroger Company (KR) and predicted the stock was set to reverse its long-term downward trend in a big way. I’m generally not the type of person to pay myself on the back when something like that works out in my favor, but since the stock was below $25 then, and as of this writing is surging above $30 – that’s more than 20% in two months, if you’re keeping track – I feel pretty good about that prediction.

    The other, more important reason that it seems like a good time to revisit this stock is because in spite of this nice, big rally, the stock is still undervalued. That’s pretty remarkable considering how far the stock has already moved, but it means that there is still plenty of good opportunity to work with a stock with some really terrific fundamental strength behind it and a management team that is actively working to stay competitive with bigger companies like Amazon.com (AMZN), Target Stores (TGT) and Walmart (WMT). Those are also stocks that get a lot more buzz in the media but whose value proposition is significantly less compelling. I still think that if you’re looking for a way to invest in the stock market defensively using the Consumer Staples sector, KR is one of the best plays available.



    The Kroger Company (KR) is one of the most well-established, nationwide names in the grocery business, and they’ve held up well for decades even as companies like WMT and AMZN have pushed their way in and changed the competitive landscape of their industry. Not only am I willing to bet there is a Kroger-owned grocery store close to where you live, I’m also going to go out on a limb and say that you probably visit that store a handful of times every month at least. That is the kind of “stickiness” that analysts like to point to when they look for companies that will generally hold up in a troubled economy. 

    This is a company that has faced challenges from competitors large and small and manages to find its own way to not merely survive, but remain competitive and relevant. In just the last month, I’ve watched the company announce moves that should be useful to that end. Perhaps the most noteworthy just crossed newswires this morning, as the company is expanding its delivery portfolio. They already offered online order pickup and delivery from almost half of its stores nationwide via its Clicklist service, but is now adding the ability to ship home essential and non-perishable items at a lower cost using its Kroger Ship service. This is a non-subscription-based service, priced at $4.99 for two-day shipping on orders under $35, and free for orders above that minimum. It’s clearly designed to compete favorably with Amazon’s Prime Pantry service (which charges a higher delivery fee and requires an active Prime membership), and Target’s Restock service (next day delivery, free if you pay with a Target credit or debit card). The service is rolling out initially in four markets (Cincinnati, Houston, Louisville, and Nashville), with plans to expand to other markets in the next few months.



    Fundamental and Value Profile

    The Kroger Co. (Kroger) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a current market cap of $24.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 26%, while sales increased at a modest rate of about 3.5%. The story is a little different, but not in a bad way in the most recent quarter, as KR saw an earnings improvement of 16% against an improvement of almost 21% in sales. The company operates with narrow margins, as Net Income was about 2.9% of Revenues for the last twelve months. This number improved in the most recent quarter to 5.39%.
    • Free Cash Flow: KR’s free cash flow is healthy, at about $824 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.7 billion in cash and liquid assets.
    • Debt to Equity: the company’s debt to equity ratio is 1.74, which is a fairly high number under most circumstances, but which is also roughly inline with the industry average.
    • Dividend: KR pays an annual dividend of $.56 per share, which translates to an annual yield of 1.85% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods uses the stock’s Book Value, which for KR is $8.54 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.54. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Food & Staples Retailing industry’s average is 3.1, putting KR bit above its counterparts. The stock’s historical Price/Book Ratio, however is 5.06, significantly above its current level. The stock would have to rally to about $43 per share to reach par with its historical average. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The stock appears to be breaking resistance at around $29.50, defined mostly by the trading range it held from early June until late July. Prior to that point, the stock had held in a range between $23 and $26 per share. The break above that range in early June confirmed a long-term downward trend reversal that had extended back to the beginning of 2016. The stock’s next most likely resistance level, based on previous pivots, is in the $33 to $35 price area, with support at the latest breakout level between $29.50 and $30 per share.
    • Near-term Keys: If you’re looking for a good long-term, value-oriented play, the stock remains an excellent bargain, so there is little reason not to take advantage right now. The stock is only about $1 away from its 52-week high at around $31.50, so if you’re looking for a shorter-term bullish trade using swing or trend strategies, you should probably wait until the stock breaks above that level, with a short-term target price around $35. If the stock breaks down below $30, it could see room to drop to between $26 and $27 fairly quickly, which could offer an attractive bearish setup using put options or by shorting the stock.


  • 06 Aug
    Trade war fears are making MU look like a fantastic bargain

    Trade war fears are making MU look like a fantastic bargain

    No matter how much the market tries to focus on something else, it seems like the trade war always manages to find its way to the front and center position of market commentary and awareness. That was true again over the weekend as the Chinese government countered the Trump administration’s latest proposal of $200 billion in new tariffs with $60 billion of their own against U.S. goods. It keeps worries about what the actual impact and effect of a long-term trade war with our country’s largest trade partner is going to be. It’s definitely one of the most obvious factors that has contributed to the market’s increased volatility throughout the year, and I think it is going to continue to hold people’s attention throughout the year.

    Naturally, one of the things this kind of uncertainty should make you do is to think about how it is going to impact the investment decisions you decide to make. In this day and age, it’s hard to find publicly traded companies that aren’t doing business in some way with China or other parts of the world, like the E.U., where the trade war is front and center – either by selling their products there or having them manufactured and produced there and then bringing them back home. The global nature of our economy, and the interconnectedness that we now live in means that even the smallest of companies are likely to have some element of exposure to global trade risk. That reality means that companies with known ties to China and other parts of the world are subject to even greater price volatility and general market risk.



    The semiconductor industry has been an interesting proxy for trade war risk  since mid-March when the saber-rattling first began in earnest. As measured by the iShares Semiconductor ETF (SOXX), the sector dropped a little over 50% by the end of April. It has rebounded a bit since then, but remains about 6% below its March high point. That has put a significant amount of pressure on a lot of big names in the sector like Intel Corporation (INTC), Applied Materials, Inc. (AMAT), Micron Technology, Inc. (MU) and Lam Research Corporation (LRCX), to name just a few that all remain well below – by at least 15%, if not more – their 52-week highs. And while I don’t think you should discount or dismiss trade war risk for these companies, I do think that a proper amount of perspective can help to determine how significant their risk really is versus what the market perceives their risk to be. It can also help to determine if a stock’s discounted price because of trade war fears could offer an under-appreciated bargain opportunity for value investors.

    MU is a great example of what I mean. Last month, the company made headlines – but not in a good way  – when they confirmed that a court in China had granted a preliminary injunction banning its Chinese subsidiaries from selling its products in the country. The stock has shown some resilience since that news broke, but remains under pressure, down nearly 20% from its high around $65 in late May. The perception, of course is that the measure, which seems clearly intended as a targeted countermove to U.S. tariffs, is going to have a significant negative impact on MU’’s business. The reality, however is quite different; the company estimated when they confirmed the injunction that the impact would only be about 1% of total revenue for the quarter, or about the same percentage that Chinese sales made up of their revenues over the last year. In the meantime, demand appears to remain strong, as the company also reaffirmed their own forward estimates of revenue. Another element that has contributed to strength for MU is the fact that supply of DRAM/NAND memory chips lags demand, which is keeping their pricing strong. It is possible that the negative revenue impact from the China sales ban could simply intensify the shortage; that could act as an extra pricing tailwind in the near-term.

    As you’ll see next, there really is a lot of like about MU’s business right now, and while the stock’s negative price performance does suggest short-term risk exists, the fact is that does look like a very good value play right now.



    Fundamental and Value Profile

    Micron Technology, Inc. (MU) is engaged in semiconductor systems. The Company’s portfolio of memory technologies, including dynamic random-access memory (DRAM), negative-AND (NAND) Flash and NOR Flash are the basis for solid-state drives, modules, multi-chip packages and other system solutions. Its business segments include Compute and Networking Business Unit (CNBU), which includes memory products sold into compute, networking, graphics and cloud server markets; Mobile Business Unit (MBU), which includes memory products sold into smartphone, tablet and other mobile-device markets; Storage Business Unit (SBU), which includes memory products sold into enterprise, client, cloud and removable storage markets, and SBU also includes products sold to Intel through its Intel/Micron Flash Technology (IMFT) joint venture, and Embedded Business Unit (EBU), which includes memory products sold into automotive, industrial, connected home and consumer electronics markets. MU has a market cap of $60.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings more than doubled – growth was 128%, while sales growth was above 40%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize their business operations. Net Income as a percentage of Revenues for MU is very impressive at more than 43% for the last twelve months and improving to nearly 50% in the last quarter.
    • Free Cash Flow: MU’s free cash flow over the last twelve months is more than $7.5 billion. Cash and liquid assets are also almost $7.1 billion, against only about $5.9 billion of long-term debt.
    • Debt to Equity: MU has a very conservative debt-to-equity ratio of .20. As already observed, their available cash and liquid assets is about $1.2 billion higher than their long-term debt, and with their high operating margin, there is clearly no issue with the company’s ability to service, or even to liquidate their debt.
    • Dividend: MU does not pay a dividend.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MU is $25.45 per share. At the stock’s current price, that puts the Price/Book ratio at 2.05, versus a historical average of 2.26. The historical average puts the stock’s “fair value” at about $57.50, which is only about 10% away from its current price. That’s not very compelling by itself, but there are a couple of other measurements that, put together, offer what I think is an enhanced perspective. The stock’s P/E ratio – which, admittedly, I usually discount – right now is very low, at 5.12 times earnings compared to an historical average of 9.02. Also, their Price/Cash Flow ratio is 4.2 versus an historical average of 7.02. Those measurements are each 40% their historical averages. I think a 40% increase in the stock price is probably over-optimistic even as a long-term target since the stock’s 52-week high around $65 is higher than the stock has been since mid-2000 (the end of the “dot-com boom”); but it does put that high within sight, meaning that the opportunity in the stock right now is nearly 20%. That’s a very nice opportunity from a value-based standpoint!



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until May of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock’s decline from late May’s high at around $65 puts the stock in a clear, intermediate-term downward trend. More recently, the stock has round strong support in the $52 price range, just a little above the 38.2% retracement line. That support level also coincides pretty well with trend support from the 50-day moving average (not shown), indicating that the stock’s long-term trend should be expected to hold its strength for the foreseeable future. A break below $50, however would put the stock’s price decline above 20% and into bear market territory; I would take that as an early warning sign the long-term trend could reverse, with a further drop below $45 – about where the 50% retracement line sits right now – acting as confirmation of a bearish trend reversal.
    • Near-term Keys: The question for a long-term, value-oriented investor is whether you would be willing to endure the kind of potential decline that could come if the stock breaks its current long-term trend support. I think the stock offers a great value right now; but if you think the stock’s current bearish momentum is going to extend further, it could be better to wait to see if the stock offers an even bigger value by consolidating around $45 per share. Short-term traders should wait to see the stock break above current pivot resistance around $57 before trying to buy the stock or work with call options to take advantage of a bullish swing. A drop below $50 could offer a reasonable short-term opportunity by shorting the stock or working with put options, with $46 as a pretty attractive near-term target price.


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