• 05 Oct
    Macy’s (M) isn’t just a nice place to shop; it’s a good stock at a nice price, too

    Macy’s (M) isn’t just a nice place to shop; it’s a good stock at a nice price, too

    Warren Buffett is easily the most recognizable value investor in the world. He didn’t invent the idea – his college instructor and mentor, Benjamin Graham, gets credit for pioneering the concept of determining how much a company should be worth based on its book of business – but he may be the most successful value investor of all time. The annual reports he has written for decades for Berkshire Hathaway (BRK.A) are major events for other value investors for the insights they offer about his investing methods and attitudes about current market conditions. He’s also pretty quotable; one of my personal favorites among his many descriptions about value investing refers to it as “buying a good stock at a nice price.”

    One of the most impressive-performing sectors in the market throughout the year has been the Consumer Discretionary sector; as of this writing, and as measured by the SPDR Select Consumer Discretionary ETF (XLY), the broad sector has increased in value by more than 13% year-to-date. On a more focused scale, department stores have been a mixed bag; some, like TGT, KSS, and M have increased by 30 to 50% or more, while others, like JWN and DDS have only seen modest increases in price.

    Macy’s Inc. (M) is an interesting case, not only for its impressive performance year-to-date, but also for the fact that despite the fact that is nearly 31% higher so far this year, it remains deeply discounted; after hitting a peak at around $42 in mid-August, the stock has dropped back nearly 22% to its current levels. That actually doesn’t even speak to the fact that at its current price, this fundamentally solid company is trading at an extreme discount based on more than one of my favorite valuation metrics.



    Fundamental and Value Profile

    Macy’s, Inc. is an omnichannel retail company operating stores, Websites and mobile applications under various brands, such as Macy’s, Bloomingdale’s and Bluemercury. The Company sells a range of merchandise, including apparel and accessories (men’s, women’s and children’s), cosmetics, home furnishings and other consumer goods. Its subsidiaries provide various support functions to its retail operations. Its bank subsidiary, FDS Bank, provides credit processing, certain collections, customer service and credit marketing services in respect of all credit card accounts that are owned either by Department Stores National Bank (DSNB), which is a subsidiary of Citibank N.A., or FDS Bank. The private label brands offered by the Company include Alfani, American Rag, Aqua, Bar III, Belgique, Charter Club, Club Room, Epic Threads, first impressions, Giani Bernini, Greg Norman for Tasso Elba, Holiday Lane, Home Design, Hotel Collection, John Ashford, Karen Scott, Thalia Sodi and lune+aster. M’s current market cap is $10.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 23%, while sales were flat, increasing not quite .5%. In the last quarter, earnings showed the same kind of growth, at almost 23%, and sales growth of just over .5%. M’s margin profile has narrowed, from about 6.6% over the last twelve months to 2.88% in the last quarter.
    • Free Cash Flow: M’s free cash flow is healthy, at about $1.5 billion for the trailing twelve month period and translates to a Free Cash Flow yield of a little over 15%.
    • Debt to Equity: M has a debt/equity ratio of .93, a relatively low number that indicates the company operates with a conservative philosophy about leverage. Their balance sheet indicates operating profits are more than adequate to service their debt, with healthy flexibility from cash and liquid assets as well.
    • Dividend: M pays an annual dividend of $1.51 per share, which translates to a yield of 4.52% 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 M is $19.20 per share and translates to a Price/Book ratio of 1.71 at the stock’s current price. Their historical Price/Book average is 3.06, which suggests that the stock is trading at a discount right now of nearly 79%. Their Price/Cash Flow ratio is a little less optimistic, since it is currently running “only” 42% its historical averages. Between the two measurements, the long-term target price could lie anywhere in a range between $47 and $58 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 traces the stock’s upward  trend over the past year and which reached its high in mid-August at around $42. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock’s retracement from its 52-week high has put the stock almost on top of the support level shown by the 38.2% retracement level. It isn’t a given the stock will reverse and move higher off of that support level, but it does look like a good level to start looking for a move back to the upside.
    • Near-term Keys: The $30 range shown by the 50% retracement level also coincides with previous pivot levels; if the stock breaks below its current support level, a drop to that level could offer an even better value opportunity if you’re willing to work with a long-term perspective. If you prefer to work with short-term trading methods, you’ll need to wait to see the stock actually start to move higher off of its current support level and breaks above the $34 level to think about buying the stock or working with call options, while a break below $32 could offer an interesting opportunity to short the stock or start buying put options.


  • 04 Oct
    Oil prices are up, and that could be bad news for highly-valued refining stocks like HFC

    Oil prices are up, and that could be bad news for highly-valued refining stocks like HFC

    If you’ve been paying attention to energy prices over the last six weeks or so, you’ve observed a pretty impressive rally in oil. Since August 15th, when it hit a pivot low at around $65 per barrel, West Texas Intermediate crude has jumped almost 14% to its current level at around $75.50. The surge in Brent crude has been even bigger, going from around $71 per barrel to a little above $86, or almost 22% over the same period. More →

  • 03 Oct
    GE just hired a rock star CEO. Is it time to call them a good value play?

    GE just hired a rock star CEO. Is it time to call them a good value play?

    The market was buzzing at the beginning of the week when General Electric Company’s (GE) board announced they were firing the CEO they brought in just a little over a year ago, John Flannery, and replacing him with Larry Culp, the 54-year old former CEO of Danaher Corporation (DHR). The news pushed the stock up overnight in a big way, as it opened Monday morning nearly 16% above its closing price on Friday. More →

  • 02 Oct
    International diversification could be a good thing with BRDCY

    International diversification could be a good thing with BRDCY

    One of the principles a lot of investment advisors and money managers point to when they talk about risk management is diversification. Diversification means spreading your investing dollars across multiple different opportunities. The general idea is that the greater your diversification, the less exposed you are to risk in any one stock. More →

  • 01 Oct
    If discount shopping is your thing, don’t ignore DLTR

    If discount shopping is your thing, don’t ignore DLTR

    I write a lot about value investing in this space; each day, I like to try to to identify areas of the market where I think good value lies, as well as where some significant investment risks lie. If you listen to a lot of talking heads on TV, when a popular, well-known stock starts to drop in price, you’ll almost always start hearing about what a great deal the stock is at that price More →

  • 28 Sep
    Which auto stock is a better investment right now: FCAU, GM or F?

    Which auto stock is a better investment right now: FCAU, GM or F?

    Earlier this week, I wrote about recent opinions I’ve seen that suggest that the stock market’s long, extended bullish run still has plenty of life left to keep going. One of the most compelling arguments supporting that opinion is the fact that, after the market’s big correction in the early part of this year, most of the market’s recovery has been led by beaten-down stocks in previously under-appreciated and oversold industries. That suggests the bullish momentum that has pushed the market higher since April when it found a corrective bottom is driven by an emphasis on value, which does offer some very compelling food for thought. Value-driven market rotation usually happens at the beginning of a bull market, not in the latter stages of one, so I think there could more than a little truth behind the notion.

    Let’s go ahead assume for the time being that this idea is correct; it begs the next question, which is naturally, where am I going to find the best values in the market right now? It’s one thing to tell you to look for beaten-down stocks in depressed industries; it’s quite another to actually recognize what some of those areas of the market are right now.



    As I previously mentioned, the auto industry is an area of the market that has really come under a lot of pressure. While the broad market has seen a nice rally since April of this year, the Big Three automakers have all seen significant drops in price. Fiat Chrysler Automotive (FCAU), Ford Motor Company (F) and General Motors Company (GM) are all down around 25% since reversing lower from their respective high points in April and June. Yes, a not-insignificant part of that drop has been driven by trade-related tensions with all four of America’s largest trading partners, and for as long as those tensions persist, there remains an element of risk that could keep pushing these stocks lower. Even so, the fact they are all down in bear market territory should at least have any sensible value-oriented investor sit up, take notice, and consider whether there is an opportunity worth thinking about.

    What follows is a comparison of all of the Big Three U.S. automakers, side by side, to determine which of the three actually poses the best value-based argument right now. Does that mean that you should think about taking a position in the winner right now? That is for you to decide.



    Earnings/Sales Growth

    • Ford: Over the last twelve months, earnings decreased by almost 52% while sales were mostly flat, declining by only about 2%. The company operates with a narrow margin profile that saw Net Income at 4.2% of Revenues over the last twelve months, and decreased to only about 2.7% in the last quarter.
    • GM: The twelve-month pattern for GM shows earnings decreasing only a little over 4%, and sales mostly flat, declining about .6%. GM’s margin profile over the last twelve months showed Net Income was a negative 3.2%, but improved in the last quarter to positive 6.5%.
    • Fiat Chrysler: Earnings over the last twelve months declined 2.63% for FCAU versus sales growth of 12.62%. The company’s margin profile showed Net Income as 3.1% of Revenues in the last twelve months, and declining to 2.5% for the most recent quarter.

    Winner: FCAU, on the basis of superior earnings and sales results in the last year versus F or GM.

    Free Cash Flow

    • Ford: F’s free cash flow is quite healthy, at more than $9.1 billion over the last twelve months. That translates to a Free Cash Flow Yield of 23.5%, which is extremely attractive.
    • GM: GM has operated with negative Free Cash Flow since the last quarter of 2016, and as of the last quarter this number was a little more than -$12.3 billion dollars.
    • Fiat Chrysler: FCAU’s Free Cash Flow over the last twelve months is healthy at a little more than $4.9 billion. That translates to a Free Cash Flow Yield of 13.8%

    Winner: F, with the highest total dollar amount in Free Cash Flow over the twelve months along with the most attractive Free Cash Flow Yield.



    Debt to Equity

    • Ford: F has a debt/equity ratio of 2.8. High debt/equity ratios aren’t unusual for automotive stocks, however it should be noted that F’s debt/equity is the highest among the Big Three auto companies. The company’s balance sheet demonstrates their operating profits are sufficient to service their debt, with healthy liquidity to make up any potential difference if that changes.
    • GM: GM’s debt/equity ratio is 1.81, which is also pretty high, but below that for F. The difference, however is that while GM’s operating profits should be adequate to service their debt, they may not have enough liquidity to make up any potential operating shortfall.
    • Fiat Chrysler: FCAU’s debt/equity ratio is the lowest of the group, at .46. That alone puts them well ahead of the other two in this category; but it is also worth noting that the company’s cash and liquid assets are more than 34% higher than their long-term debt. That gives them the best actual financial base to operate from out of any of the Big Three.

    Winner: FCAU. Not even close.

    Dividend

    • Ford: F pays an annual dividend of $.60 per share, which translates to a very impressive yield of more than 6% per year.
    • GM: GM’s dividend is $1.52 per year, translating to an annual yield of 4.51%
    • Fiat Chrysler: FCAU does not pay a dividend.

    Winner: F. Dividends are the low-hanging fruit that every value-oriented investor should look out for.



    Value Analysis

    • Ford: F’s Price/Book value is $9.18 per share and translates to a Price/Book ratio of 1.07 at the stock’s current price. Their historical average Price/Book ratio is 2.12, which suggests the stock is trading right now at a discount of more than 97%. The stock is also trading about 60% below its historical Price/Cash Flow ratio.
    • GM: GM’s Price/Book value is $27.38 and translates to a Price/Book ratio of 1.23 at the stock’s current price. Their historical average Price/Book ratio is 1.9, which suggests the stock is trading right now at a discount of 54%. The stock is also trading more than 129% below its historical Price/Cash Flow ratio.
    • Fiat Chrysler: FCAU’s Price/Book value is $13.87 and translates to a Price/Book ratio of 1.29 at the stock’s current price. Their historical Price/Book ratio is 1.32, suggesting the stock is trading at a discount of 2.3%. The stock is also trading 55% above its historical average Price/Cash Flow ratio, suggesting the stock remains significantly overvalued, even at its current price.

    Winner: F, edging out GM for best overall value proposition, but not by a wide margin.

    The net winner? While FCAU has the best overall fundamental profile, it offers the least upside potential, with a significant level of downside risk. That puts F squarely in the winner’s circle for the best overall opportunity among the Big Three automakers under current market conditions. On the other hand, the greatest overall risk remains with GM, who despite the upside offered by its value measurements, has some big fundamental question marks that make the value proposition hard to justify.


  • 27 Sep
    Semiconductors are struggling, but this small-cap stock could be a Diamond in the Rough

    Semiconductors are struggling, but this small-cap stock could be a Diamond in the Rough

    The semiconductor industry has been one of the interesting segments of the Technology sector to watch for a few years now. Since 2016, the industry as measured by the iShares Semiconductor ETF (SOXX) has outpaced the rest of the broad stock market by a wide margin, increasing in value by more than 140%; by comparison, the S&P 500 increased by 60% over the same time period. Since hitting an all-time high in mid-March, however, the industry has stagnated, falling almost 8% as of this writing from that peak. More →

  • 26 Sep
    GPRE: Sometimes a cheap stock is just a cheap stock

    GPRE: Sometimes a cheap stock is just a cheap stock

    If you spend a lot of time paying attention to the stock market, you start to build a pretty long list of stocks that you follow. A lot of the stocks you pay the most attention to are the ones that have been the most productive for you in terms of functional trading; they’re the ones that you’ve been able to turn back to on multiple different occasions, with generally positive results. More →

  • 25 Sep
    Not all related stocks are created equal, and HRL proves it

    Not all related stocks are created equal, and HRL proves it

    One of the regular themes of my posts for the last several months, as well as the trades I’ve been placing since the late winter and early spring months of this year, has been the need to focus on making my investment approach more conservative. That flies in the face of a lot of analysts and experts More →

  • 24 Sep
    Ford Motor Company (F) has an interesting value argument; is it worth the risk?

    Ford Motor Company (F) has an interesting value argument; is it worth the risk?

    Nothing has kept the market more on edge this year than trade tensions and the threat of a trade war between the U.S. and its trade partners. Things only seem to get more intense this week, as the Trump administration is set to impose new 10% tariffs on $200 billion of Chinese goods on Monday. More →

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