• 10 Sep
    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Since mid-July, I’ve written twice previously about Western Digital Corporation (WDC). The first time I wrote about them, the stock was priced around $75 per share, and my analysis showed that was a nice price for a good company that had hit an all-time high at around $107 just a few months before. On August 9, I wrote about them again, because the stock had dropped even lower, to around $66 per share, but now also had its most recent earnings report to add to the mix. At a price that was about 12% lower than just a few weeks before, and with a terrific fundamental profile, what had been a “nice’ price for the stock was now looking like a “great” price. Fast forward a month, and as of this writing the stock is now below $58 per share. The fundamentals haven’t changed in four weeks, but in the last week or so the stock picked up some more negative momentum and is pushing to even deeper lows.

    So what’s been driving the latest plunge, which has driven the stock down a little over 23% since my first post in July? 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 July 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 storage continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed.

    The picture for NAND and SSD storage – memory that is built on solid-state technology, and what has increasingly become the preferred storage type in the consumer market, including for personal computers of just about any type, tablets, and pretty much any type of mobile device – also appears murky, and that is another element that is working against the stock’s price right now. Multiple recent reports from industry analysts indicate that pricing for NAND memory is dropping amid concerns about oversupply as well as increasing competition in the space. That puts pressure on the second tier of WDC’s business strategy; the first tier continues to provide HDD storage to the enterprise and cloud storage market (where the larger capacities available from traditional drives is needed), while the second included the 2016 acquisition of SanDisk to put them at the front of pack in the consumer-driven NAND and SSD market.



    The truth, of course is that 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 and is a major centerpiece of every argument I’m finding against paying attention to this space right now. That is actually one of the biggest reasons that i continue to think the opportunity with the stock is even better today than it was a month ago.

    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. I’m even willing to concede that pricing pressures in the NAND and SSD space could impact the company’s earnings in the near term; but I think the market is over-selling that risk to the point that the stock’s incredibly deep discount now – more than 46% below its March high – is making the stock an undeniable bargain. Even the analysts that are writing scary predictions right now are putting the stock’s long-term target price at around $75, which is about 30% above the stock’s current price, and not too far from my own target, as you’ll see below.



    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 $16.8 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 NAND and 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 almost 3.5% at the stock’s current price. That fat dividend – quite a bit higher than the S&P 500 average, which is a little below 2% – is a good reason to think seriously about buying the stock and waiting out any near-term price volatility you might have to endure. It’s free money you don’t have to do anything for except to hold your shares.
    • 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 1.45 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 31%, which is very attractive, since it puts the stock’s long-term target price at nearly $84 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 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 stock is currently plumbing lows not seen since late 2016, where previous pivots put the most likely support in the $53 range.
    • Near-term Keys: As you can see, the stock is already offering a massively 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 would come if the stock manages to break prior pivot support at around $53. That could see the stock drive even lower and into the mid-$40 range.


  • 07 Sep
    Why SLCA’s 42% drop since May is a GOOD thing

    Why SLCA’s 42% drop since May is a GOOD thing

    Over the last four years, one of the most interesting segments of the economy to pay attention to has been the energy sector. That doesn’t mean following the biggest players in the the oil industry, although there have been some really interesting investing opportunities among those companies over the last couple of years. It also means keeping track of “energy-related” stocks. Like the smart entrepreneurs during the California Gold Rush More →

  • 06 Sep
    U.S. – Canada trade fears have created a great value opportunity for this Detroit supplier

    U.S. – Canada trade fears have created a great value opportunity for this Detroit supplier

    Last week the Trump administration announced it had made a deal with Mexico to rework the two countries’ two-and-a-half decades long trade agreement. There is a third party in that agreement, of course, since NAFTA originally included the U.S., Mexico and Canada. The move has clearly put more pressure on the Canadian government to compromise, although to this point it doesn’t appear much more progress on that front has been made.

    Tensions between the U.S. and Canada have revolved primarily around tariffs on autos, although other goods have been involved as well. Concern around trade issues between the two countries have weighed on Canadian stocks that rely heavily on partnerships with U.S. business. Magna International (MGA) is a good example; since late May, when the stock hit an all-time high at around $67.50, the stock has lost about 25% of its value. Trade issues between the U.S. and Canada aren’t over, and that means that momentum for stocks like MGA could continue to be mostly bearish; at the very least, investors who are interested in this stock should expect to see plenty of volatility in the weeks and months ahead as the market decides what direction the stock should follow.



    Over the last month alone, the stock has dropped about 10%, after the company missed estimates in its latest earnings report. That pushed the stock into an even more decidedly bearish near-term profile, as the stock crossed below its 200-day moving average line. This moving average acts as an important visual indicator of a stock’s long-term trend for most technicians, and so a move below that line is usually taken as a clear sign the stock’s current trend is going to keep moving down. Over the last couple of weeks, however, the stock has shown some interesting resilience, finding support around $52 per share. Despite the market’s reaction to their latest report, the truth is that the earnings picture is actually pretty good for MGA, and the overall fundamentals for this company remain quite good. 

    The company’s earnings report did include tariffs as a risk element in the third and fourth quarters of the year, and that is probably another big reason the stock has continued to drop. I think it’s worth pointing out, however that the U.S. – Mexico announcement took the market by surprise and wasn’t expected; to me that means that for all the posturing that has gone on (and continues) between the countries involved, it’s really all about what happens behind closed doors. I think Canada it’s ultimately going to be in the best interest of both the U.S. and Canada to bring all three American trading partners back together again, and so most of the bearish sentiment around stocks like MGA is really just creating good opportunities to pick up some great companies at very nice valuation levels.



    Fundamental and Value Profile

    Magna International Inc. (Magna) is a global automotive supplier. The Company’s segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company’s product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops. MGA has a current market cap of about $18.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew almost 13%, while Revenues grew a little over 6%. Growing earnings faster than sales is hard to do, and generally isn’t sustainable in the long term; however it is also a positive mark of management’s ability to maximize a company’s business operations. In the last quarter, the picture turned negative, with earnings decreasing a little over 9% and sales declining almost 5%. That could be a first, early indication of impact from tariffs on costs, both for MGA as well as for its customers.
    • Free Cash Flow: MGA’s free cash flow is healthy, at a little more than $1.9 billion. This number has been somewhat cyclic from one quarter to the next, but has shown a general, upward stair-step pattern of growth going back to the last quarter of 2016.
    • Dividend: MGA pays an annual dividend of $1.32 per share, which translate to an annual yield of 2.48% at the stock’s current price. 
    • Return on Equity/Return on Assets: These numbers are very strong. ROE is 19.72 and ROA is 8.94.
    • 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 MGA is $33.97 and translates to a Price/Book ratio of 1.56 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.94, suggesting the stock is nicely undervalued by about 24%; at par with its average, the stock should be trading at about $66 per share. Working with $66 as a long-term target is even more justified by looking at the stock Price/Cash Flow ratio, which is currently 30% below its historical average. That would put the stock in range to test its all-time highs and in position to start making new ones.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: After following a nice upward trend until May, the stock peaked at around $67.50 before dropping back its current level. The gap you see in early August came in conjunction with the company’s last earnings report, and in fact that gap is providing resistance right now against any further movement upward for the stock. I already alluded to its 200-day moving average (not shown); the stock is about $5 per share below that line, and would need to break above it to stage any kind of new upward trend. A drop below $52 per share would mark a break below the stock’s long-term support level and could provide bearish momentum for a continued decline to as low as $45 in fairly short order.
    • Near-term Keys: The stock’s most current resistance is at around $56, from a pivot high just about a week ago; if the stock can break that level, there could be a good short-term opportunity to buy the stock or work with call options. If you like the stock’s value potential right now, and don’t mind dealing with what I think will be quite a bit of volatility for the time being, this could be a great time to go ahead and take a position with a long-term time frame in mind. If you prefer to work with the bearish side of the market right now, wait to see if the stock drops below $52; if it does, consider shorting the stock or working with put options.


  • 05 Sep
    SMG: Agriculture, or Marijuana value play?

    SMG: Agriculture, or Marijuana value play?

    When most folks start looking for opportunities to invest their hard-earned and saved dollars, they usually gravitate to the stocks that they hear about the most. It makes sense – most of us have a limited amount of time to pay attention to the market, and so we tend rely on the brief snippets of information we can glean by catching a few minutes of market news on CNBC or Bloomberg or by surfing market headlines on the Web. That usually means that if an industry or segment of the economy isn’t getting a lot of attention from the talking heads and “experts” that dominate market media, it isn’t going to catch even the slightest whiff from the average investor.

    Agriculture stocks are one of those industries that everybody seems to understand plays an important role in the ebb and flow of the economy, but that nobody really cares to pay a lot of attention to. Let’s face it: these are companies that just don’t have the same kind of buzz or cool, cutting-edge appeal of the tech industry or the wide, volatile swings of other sectors like energy, biotech, or pharmaceuticals.



    Yesterday I saw an interesting report that indicated the average age of farmers in the United States is advancing in troubling ways. With an average age of 58.3 years and climbing, the implication is that as the latest generation of farmers retire or pass away, the remaining workforce isn’t going to be large enough to serve the massive need associated with being able to feed and clothe the world. That isn’t just America’s responsibility, of course, but the same study indicates that the trend of advancing farmer age is consistent in other developed countries around the world.

    The interesting side note to this trend as an investor is that even if the worst-case scenario doesn’t emerge, pressure on the agriculture industry to keep up with demand should provide some good long-term opportunities for the companies that can help the entire sector stage a comeback. While agriculture has been “out of favor” with investors in general for decades, this could be on of the best opportunities to find really great value in the years ahead.



    Another trend that has been gaining a lot of traction throughout the world, and that is almost sure to have an impact on the farming sector is cannabis legalization. No matter whether you’re talking about the legalization of cannabis for recreational or medicinal purposes, or both, the odds are excellent that some of the really terrific growth opportunities will come from stocks that focus a significant portion of their business on cannabis. Scotts Miracle-Gro Company (SMG) may not be exclusively focused on cannabis – they are more generally known as the company that makes the fertilizer you probably buy at Lowe’s or Home Depot –  but through their Hawthorne Gardening Company, they provide products to help artisanal farmers grow cannabis. It’s a large enough portion of their current operations that a lot of the attention the stock has been drawing in the market lately has come from discussions about marijuana.

    Depending on the measurement you use, the stock could be quite undervalued right now. The fact is that the stock began a strong downward trend in January of this year, falling from a peak around $110 to its current level around $75. That’s a decline of 46% over the last eight months. The stock has some fundamental elements; some that suggest a significant amount of strength in their business and management approach, and others that raise some red flags. To some extent, that means that value for this company is in the eye of the beholder. I’ll cover the numbers that I think are the most interesting and useful, and outline the parameters around the stock’s price action that I think could offer investors a good reward: risk opportunity.



    Fundamental and Value Profile

    The Scotts Miracle-Gro Company (Scotts Miracle-Gro) is a manufacturer and marketer of branded consumer lawn and garden products. The Company’s segments include Global Consumer. In North America, its brands include Scotts and Turf Builder lawn and grass seed products; Miracle-Gro, Nature’s Care, Scotts, LiquaFeed and Osmocote gardening and landscape products; and Ortho, Roundup, Home Defense and Tomcat branded insect control, weed control and rodent control products. In the United Kingdom, its brands include Miracle-Gro plant fertilizers; Roundup, Weedol and Pathclear herbicides; EverGreen lawn fertilizers, and Levington gardening and landscape products. SMG has a current market cap of about $87.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings were nearly flat, growing only 1.5%, while sales decreased almost 8%. The picture isn’t better in the last quarter, with earnings falling a little over 7% while sales declined almost 2%. Much of the decline in sales appears to have been attributed to revenues in the Hawthorne division that missed management’s targets and was blamed primarily on cannabis regulatory delays in California. As more states adopt more liberal regulations around cannabis production and sales, the industry’s reliance on California as a primary market is expected to decrease. More interesting is the fact that despite the earnings and sales declines, the company managed to improve their operating profile in the last quarter, as Net Income as a percentage of Revenues increased, from 6.7% over the last twelve months to 8.3% in the most recent quarter.
    • Free Cash Flow: SLB’s free cash flow is adequate, at a little more than $201 million. This number declined in the last quarter from about $300 million.
    • Return on Equity/Return on Assets: These numbers are very strong. ROE is 43.37 and ROA is 7.45.
    • 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 SMG is $9.58 and translates to a Price/Book ratio of 7.79 at the stock’s current price. The stock’s historical average Price/Book ratio is 7.2, suggesting the stock is overvalued by about 7.5%; at par with its average, the stock should be trading at about $69 per share. To provide a compelling bargain relative to its historical Price/Book levels, the stock would need to drop to around $55 per share. That doesn’t sound favorable from a value standpoint right now, of course, but an interesting counterpoint comes from analyzing the stock’s Price/Cash Flow ratio, which is 27% below its historical average. That gives the stock a long-term target price at around $95 per share – a level that was last seen in late January.



    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 downward trend from January of this year until now; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. In mid-August, the stock found trend support at around $72.50 per share and has start to rally a bit from that point. The size of the stock’s decline over the last eight months means that the trend’s retracement levels, which I usually like to use to provide a strong indication of trend reversal points to pay attention to, are further from the stock’s current price than normal; after all, the $87 price level, which where we can see the 38.2% retracement level, is about 16% above the stock’s current price. If the stock breaks that level, I would expect to see the stock push high enough to test its high at around $110 per share.
    • Near-term Keys: A break above $87 would mark a pretty clear indication of a bullish trend reversal; but I’m not sure that a move to that point is necessary in this case to provide a good, high-probability opportunity for a bullish investor. The stock’s intermediate trend line, as represented by a 50-day moving average (not shown) is around $80, and that usually marks an important resistance level during a downward trend. A break above that, to about $81 with strong buying volume should give the stock good bullish momentum to push to $87, and so could be a nice early sign to work with. Even a break below the trend’s support low at around $72 per share wouldn’t be a bad thing; given the prices I described in my Price/Book ratio analysis, a drop to $69 could be an interesting point to take a value-based position if the stock shows signs of stabilization at that level. A drop below $69 should be taken as a sign the stock could drop as low as the $55 price level I also alluded to; that could act as a signal to short the stock or to work with put options for the time being, with an eye to buying the stock at a deeper discount in the $55 price area.


  • 04 Sep
    How close is SLB to being a great value play?

    How close is SLB to being a great value play?

    After the market for West Texas Light crude peaked in July 2014 above $105 per barrel, prices plunged to a low around $24 per barrel by the beginning of 2016. That decline set off an even more extended bear market for related stocks like Halliburton Company (HAL) and Schlumberger N.V. (SLB), the world’s two largest oil services companies. According to SLB’s CEO, the industry’s inability to recover even as oil prices stabilized and rebounded to their current levels (as of this writing, WTI crude is around $70 per barrel) is because of the reluctance of global oil producers to invest in new exploration and production (termed E&P) projects. After briefly rebounding to about $80 at the beginning of this year, SLB is about 21% lower and is close to its lowest point in the last two years. Does that mean the stock is a good value right now?

    In their latest quarterly earnings report, SLB’s CEO gave his view of the long-term state of the oil market. In it, he pointed out that while producers have been seeing better results lately, service companies like SLB have been forced to bid for limited project work; the excess equipment available relative to demand has limited the industry’s ability to follow producer’s trends higher, at least until the last quarter. It appears that global markets are finally starting to increase their production activity, which means that the demand for oil services like those provided by SLB is finally starting to improve. In fact, SLB projects that they will have no spare equipment capacity by the end of 2018, which will give them the ability to negotiate more favorable pricing arrangement with their customers.



    Even more favorable in the long term is that while U.S. producers have been able to ramp up production quickly is the relatively short amount of time it takes to drill a shale well. On the other hand, producers in other parts of the world don’t have the ability to bring inactive rigs back online so quickly, but the fact is that OPEC’s spare capacity, which has historically always held some capacity in reserve is at levels not seen since Operation Desert Storm in the early 1990’s. OPEC has finally decided to start increasing production, but that will also require those countries to invest in new products and projects. That means more E&P, which is exactly the kind of tune that oil service companies like to hear. That could offer a great opportunity in the long-term for investors who are interested in investing in this segment of the global economy.

    I think it is important to pay attention to what executives say about their respective markets, certainly even more than it is to track analyst forecasts. However, as a value-oriented investor, I also have to balance that information against what a company has been doing. That means using historical information to determine if the stock’s current price justifies making any kind of a bet on the long-term prospects of any stock I’m thinking about. In the case of SLB, I think the future looks encouraging, and the stock’s current price is intriguing; but based on their performance over the recent past, it doesn’t quite represent the kind of value that would make anxious to find a new opportunity right now. Here are the numbers.



    Fundamental and Value Profile

    Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of about $87.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by impressively, at more than 23%, while sales grew a little over 11%. That growth is in contrast to the company’s profile, since over the last twelve months, Net Income as a percentage of Revenues was negative, at -2.34%. The picture has gotten better over the last quarter, which I believe is a reflection of improving market conditions as described by SLB’s CEO, to a little over 5%.
    • Free Cash Flow: SLB’s free cash flow is healthy, at more than $3.5 billion. This number declined from mid-2015, when it was more than $7.5 billion, to a low in mid-2017 at about $3 billion. That’s growth in Free Cash Flow of about 16.6% in the last year.
    • 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 SLB is $26.66 and translates to a Price/Book ratio of 2.36 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.66, suggesting the stock is only about  12.7% undervalued, with a long-term target price around $71 per share. Using the stock’s Price/Cash Flow ratio shows the stock remains overvalued, since its price is current about 10.5% above that ratio’s historical average. Interestingly, at $56 per share the stock would be roughly in-line with its historical Price/Cash Flow ratio, but 20% below its historical Price/Book ratio. That gives me a good reference point for a minimum price at which I would want to see the stock priced at before I would be willing to say it is discounted enough to justify a new position.



    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 downward trend from December 2016 until the end of 2017; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. if you discount the temporary, rapid rise from the stock’s trend low point in December 2017 to its peak at about $80 in late January this year, the stock has mostly been holding a sideways trend throughout the year. Last month, the stock dropped below its sideways range up to that point and appears to be establishing a new trading range, with support around $62 and resistance right around $65.
    • Near-term Keys: I would look for a push above July’s peak around $69 to mark any kind of new, potential upward trend; that would be the minimum price that I would begin thinking about any kind of short-term bullish trading opportunities. As a value investor, I would watch the stock with a weather eye on the stock’s trend low from December 2017 around $61 as a critical test of any continued stabilization or price consolidation. A drop below that point would likely give the stock room to drop down into the $56 range – a level the stock hasn’t actually seen since August of 2010. That is where I would start giving a long-term position in the stock some serious thought.


  • 03 Sep
    Which stock is a better actual value: GIL or HBI?

    Which stock is a better actual value: GIL or HBI?

    When you spend a lot of time analyzing different segments of the market, it isn’t all that unusual to come across two competing companies in an industry that both look appear to have a pretty good argument as a good bargain opportunity in the making. When it happens, as an investor you have a decision: which one should you pick? Or, if you have the capital to work with, should you bother choosing at all, or simply work with both of them? It’s the kind of thing that I like to call “a good problem to have,” because you get to choose between two pretty good things, and that usually means that whatever you decide to do, you’ll have a pretty good chance of seeing it work out okay.

    The problem, of course, is that just because you might find a couple of stocks in the same industry that look good, it doesn’t mean that everything is as it seems. Sometimes what looks like a great opportunity is, in reality a bigger risk than you might realize until it’s too late. This is the situation I found myself in earlier this week when I started evaluating Gildan Activewear Inc. (GIL) and HanesBrands Inc. (HBI), two stocks in the Textiles & Apparel industry. You’ve probably heard of HBI, of course; I don’t think there are too many men who haven’t worn a Hanes or Champion t-shirt, or that many women who haven’t bought Maidenform or Wonderbra undergarments or L’eggs nylon stockings. You may not be as familiar with GIL; they make the same products as HBI, and they sell them under some of their own brands, like Gold Toe, American Apparel, and others. A big portion of their business, however, focuses on branded apparel for the printwear market.



    I’ve followed both stocks for some time, in part because I like both of their products; for another, I think that while the industry exists in the Consumer Discretionary sector, which can be subject to economic cyclicality, the specific niche they both reside in makes them pretty attractive as stocks that should hold up well when the economy shifts to the downside. I like the idea of working with stocks like these as defensive positions; and the fact is that both stocks have generally underperformed the market over the course of the year.

    This week the S&P 500 pushed above resistance from its late January high after the Trump administration it had reached an agreement with Mexico to rework the NAFTA trade agreement; the market seems anxious to treat the news as the first domino to fall in favor of easing trade tensions with America’s largest and most important trading partners. There’s a long way to go, however, and a completion of the agreement, or of seeing it affect the other countries the Trump administration has targeted with tariffs in the way many hope it could isn’t a given. Even if things work out as many hope in the long run, the fact remains that the market is so extended that a significant reversal is inevitable sooner or later. That means that it’s smart to keep paying attention to defensive-oriented stocks that can position you to weather the storm of a reversal more effectively than stocks trading at extremely high valuations are.

    The fact that both stocks are well below their 52-week highs is a positive, of course, but it still doesn’t mean that they both automatically represent a terrific value right now. The truth is that if you simply paid attention to each stock’s current long-term downward trend, you’d probably conclude HBI is the better option, since it is only about $1 above its 52-week low price right now, down nearly 25% so far in 2018 and almost 32% lower for the past twelve months. By comparison, GIL is down only about 14% so far for the year, and only about 6% for the last twelve months. Digging deeper into the fundamentals for each stock, however paints a pretty different picture.



    Gildan Activewear, Inc. (GIL)

    Current Price; 29.45

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 6%, while revenue increased almost 7%.  The numbers for GIL have gotten better recently, however, with earnings growing nearly 53%, and revenue improving more than 18% in the last quarter. The company cited strength in its United States-focused brands in its last earnings report, which is interesting given the fact this is a Canadian stock that most would likely figure to be hurt by ongoing trade tensions with its neighbor to the south.
    • Free Cash Flow: GIL’s free cash flow is healthy, at more than $388.24 million. This is a positive, although this number has declined since the beginning of the year from a peak a little above $500 million.
    • Dividend: GIL’s annual divided is $.44 per share, which translates to a yield of 1.49% 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 GIL is $9.15 and translates to a Price/Book ratio of 3.27 at the stock’s current price. The stock’s historical average Price/Book ratio is 3.32, suggesting at first blush that the stock is fairly valued. The picture gets more interesting, however, when you factor in the stock’s Price/Cash Flow ratio, which is currently running more than 70% below its historical average. That puts the stock’s long-term target price above $51 – well above its all-time high price from January of this year at around $34.50 per share.



    Hanesbrands Inc. (HBI)

    Current Price: $17.54

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by more than 15%, while revenue increased about 4%.  The numbers for HBI are better in the last quarter, with earnings growing 73%, and revenue improving about 16.5% in the last quarter.
    • Free Cash Flow: HBI’s free cash flow is healthy, at more than $462 million. This is a positive, although this number has declined since the first quarter of 2017 from a peak at close to $900 million.
    • Dividend: HBI’s annual divided is $.60 per share, which translates to a yield of 3.43% 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 HBI is only $2.13 and translates to a Price/Book ratio of 8.22 at the stock’s current price. The stock’s historical average Price/Book ratio is 7.18, suggesting at first blush that the stock is slightly overvalued. Like GIL, the picture gets more interesting when you consider the stock’s Price/Cash Flow ratio, which is currently running more than 200% below its historical average. That puts the stock’s long-term target price above $38, which is above the stock’s highest point since early 2015.

    Based on the numbers shown so far, both stocks look like pretty great value plays, right? Not so fast, because the truth is that I think HBI carries a much higher risk than GIL does right now, despite its much lower current price and attractive upside forecast. A significant divergence between these two companies comes when you dive into their use of debt and their operating margin profile.



    GIL currently shows $900 in long-term debt on their books. In and of itself, of course, debt isn’t automatically a bad thing, and GIL’s debt to equity ratio of .47 generally suggests the debt they have is very manageable. More importantly, the percentage of Net Income to Revenue has improved from 12.5% for the last twelve months, which is pretty healthy, to more than 14% in the last quarter. By comparison, HBI has more than $4.1 billion in long-term debt to go along with a debt to equity ratio of 5.41. That is a very high number that indicates HBI is one of the most highly leveraged companies in its industry. Their operating profile also suggests that they could have problems servicing their debt; over the last twelve months, Net Income as a percentage of Revenues was barely .5%. This number did improve in the last quarter to a little over 8%, but remains significantly below the level maintained by GIL.

    When most of the information about two stocks looks similarly attractive, a discriminating investor has to be able to split hairs to determine if one company’s opportunity is more worth the risk than the other. In this case, the fact that GIL shows a much more manageable debt burden, with operating discipline that has enabled it to not only maintain a stable level of profitability, but also to improve it, makes it a better bet than its more recognizable competitor.


  • 31 Aug
    How much should value investors pay for PRU?

    How much should value investors pay for PRU?

    Every time I start evaluating a stock as a potential investment, one of the first questions I have to answer for myself isn’t just about what the stock is doing right now; it’s about what price I think the stock should be at to represent an excellent value. As a committed value hunter, it really isn’t enough for me to say that a stock has great fundamental strength, or that its trend is moving the way I want it to right now. I also need to find a compelling reason to believe the stock should be worth significantly more down the road than it is today.

    Of course, fundamental strength and a stock’s current trend do play a role in that evaluation – but not in exactly the way most investors think. Over the years, I’ve often heard people equate value investing with contrarian investing, and maybe that’s one of the reasons I’ve come to appreciate the approach as much as I do. One of the basic ideas of contrarian investing suggests that the best investment opportunities lie in the areas that the market isn’t paying attention to right now; you’re going against the grain of the rest of the market and its trends. That’s one of the reasons that downward trends don’t concern me as much as they would if I were focusing primarily on shorter-term methods like swing or momentum trading.



    The truth is that for me, downward trends represent one of the easiest ways to start spotting good value opportunities. That’s a primary reason that just about any time I write about a stock, you’ll usually see that it’s been following a downward trend for a significant portion of time. Sometimes, downward trends are driven by significant problems within a company’s business, problems that threaten the company’s well-being and ability to survive in an increasingly competitive world. Sometimes, however, those trends are driven more by external macroeconomic factors, or simply by negative investor sentiment that ignores the underlying strength of the stock’s business. Those are the opportunities that I look for, because those downward trends really just mean that the stock’s current price could be a bargain compared to where it should be.

    Prudential Financial, Inc. (PRU) is an interesting study in value analysis. Like most stocks in the Financial sector this year, the stock has struggled to form any significant upward momentum; after peaking at around $127 in late January, the stock has dropped back significantly, touching an eight-month downward trend low at around $93 in the beginning of July. That’s a decline of almost 27%, which puts the stock squarely in its own bear market territory. Lately, however the stock has been stabilizing a bit and even looks like it is starting to build some bullish momentum. That, along with the stock’s mostly solid fundamental profile creates an interesting value proposition.



    Fundamental and Value Profile

    Prudential Financial, Inc., is a financial services company. The Company, through its subsidiaries, offers a range of financial products and services, which includes life insurance, annuities, retirement-related services, mutual funds and investment management. The Company’s operations consists of four divisions, which together encompass seven segments. The U.S. Retirement Solutions and Investment Management division consists of Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of Individual Life and Group Insurance segments. The International Insurance division consists of International Insurance segment. The Closed Block division consists of Closed Block segment. The Company has operations in the United States, Asia, Europe and Latin America. PRU has a current market cap of about $41 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 44%, while revenue decreased almost 3%. That isn’t a great indication, but it is actually better than the results most companies in the insurance industry have reported, where earnings fell over the same period.
    • Free Cash Flow: PRU’s free cash flow is very strong, at more than $15.4 billion. This number has more than doubled over the last year, when Free Cash Flow hit a bottom at around $6 billion.
    • Dividend: PRU’s annual divided is $3.60 per share, which translates to a yield of 3.65% 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 PRU is $116.53 and translates to a Price/Book ratio of .84 at the stock’s current price. The stock’s historical average Price/Book ratio is .98, suggesting the stock is almost 17% undervalued, with a long-term target price around $114 per share. The picture gets more interesting when you factor in the stock Price/Cash Flow ratio, which is currently running about 28.5% below its historical average. That increases the stock’s long-term target price to about $126.50, which puts the stock within spitting distance of the all-time peak it hit in January at around $127 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 upward trend until January of this year; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. The stock’s downward trend from January to this point is easy to spot, and its stabilization range between support around $96 and resistance around $102 is well-illustrated by its price activity over the last few weeks within the 38.2% and 50% retracement lines. This a good early indication the stock’s current downward trend could be about to reverse; the longer that range holds, the more likely a strong move back to the upside becomes. In the same sense, a break at any point above the $102 level, accompanied by strong buying volume would provide a visual confirmation that the stock is actually in the early stages of a new upward trend. A break below support at $96, however should put investors on notice that the downward trend remains in force, with a push below $92 acting as a signal that trend should extend into an even longer timeframe.
    • Near-term Keys: If you like the stock’s value proposition at its current price, and are willing to hold the stock for the long-term, you could do much worse than to buy a high-dividend paying stock at the kind of discount PRU is offering right now. If you’re looking for a way to work with shorter-term strategies, you would need to wait for a break above $102 to buy the stock or start working with call options, or a drop below $92 to short the stock or start using put options.


  • 30 Aug
    SYMC looks like a value trap!

    SYMC looks like a value trap!

    The market looks like it’s trying to reclaim the long, extended upward run it’s been following since late 2009. This week, following the announcement of a new trade deal between the United States and Mexico, the market finally broke above the all-time high it set in January of this year before dropping back a little over 10%. More →

  • 29 Aug
    In wake of U.S.-Mexico agreement, OSK could be an interesting Industrial play

    In wake of U.S.-Mexico agreement, OSK could be an interesting Industrial play

    The big news this week has really been all about the announcement from President Trump that the U.S. and Mexico have agreed to enter a new trade deal that will effectively replace the longstanding NAFTA agreement between the two countries and Canada. The specifics of the deal still remain to be seen, since in many respects they haven’t been finalized; but so far it appears to focus heavily on the auto industry, expanding the criteria for how much of an automobile must be produced in North America to qualify for tariff protection, increasing the requirement for sourcing aluminum and steel from local producers, and specifying a minimum wage of $16 per hour for workers.

    Of course, Mexico is just one of several countries the Trump administration has been targeting for changes in trade policy and agreements; but the market seems to hope that they are just the first domino to fall and ease tensions between the U.S. and its largest trade partners, including Canada, the European Union and, perhaps most significantly, China. Steel and aluminum tariffs, which were the first to be imposed this year, now appear to be in position to also be the first to ease – a development that bodes well for the prospects not only of the auto industry but also of related industries, including heavy machinery.



    One of the challenges lately for investors interested in some of the largest players in the Heavy Machinery segment is that most of the most well-known companies, like Caterpillar (CAT) and Deere & Company (DE), are already pretty expensive, running at prices well above $100 per share. Oshkosh Corporation (OSK) is a somewhat smaller player in the industry, being categorized as a mid-cap stock versus the large-cap status of its larger brethren, and it has the added bonus of being available at a lower stock price; but don’t let its smaller size fool you. This is a company that recently celebrated 100 years in business, and offers a range of vehicles that cover construction, waste management, field service and access, military and emergency response and service vehicles. Like most Heavy Machinery stocks, OSK has dropped for most of the year and is currently down about 29% since hitting an all-time high at about $100; but with a strong fundamental profile and a promising value proposition, this looks like a stock that could present a good long-term opportunity.

    Fundamental and Value Profile

    Oshkosh Corporation (OSK) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire and emergency vehicles, concrete mixers and refuse collection vehicles. The Company’s segments include Access Equipment; Defense; Fire & Emergency, and Commercial. The Access Equipment segment consists of the operations of JLG Industries, Inc. (JLG) and JerrDan Corporation (JerrDan). The Defense segment consists of the operations of Oshkosh Defense, LLC (Oshkosh Defense). The Fire & Emergency segment consists of the operations of Pierce Manufacturing Inc. (Pierce), Oshkosh Airport Products, LLC (Airport Products) and Kewaunee Fabrications LLC (Kewaunee). The Commercial segment includes the operations of Concrete Equipment Company, Inc. (CON-E-CO), London Machinery Inc. (London), Iowa Mold Tooling Co., Inc. (IMT) and Oshkosh Commercial Products, LLC (Oshkosh Commercial). OSK has a current market cap of about $5.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by about 19.5%, while revenue increased almost 7%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long-term; but it is also a positive mark of management’s ability to maximize its business operations effectively. The company operates with a narrow operating margin; over the last twelve months, Net Income was about 5.5% of Revenues. This number increased in the last quarter to a little above 7%.
    • Free Cash Flow: OSK’s free cash flow is healthy, at more than $253 million. This number has increased steadily since early 2017, from below zero.
    • Dividend: OSK’s annual divided is $.96 per share, which translates to a very impressive yield of 1.34% 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 T is $33.11 and translates to a Price/Book ratio of 2.15 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.14, meaning that the stock is practically at par with its Book Value. That doesn’t sound like there is much room to grow; but another measurement that I like to use to complement my analysis is the stock’s Price/Cash Flow ratio; in the case of OSK, the stock is trading more than 82% below its historical Price/Cash Flow ratio. While a target price at nearly $130 is probably not realistic – the stock only hit $100 for the first time in January of this year – it does imply that there is good reason to suggest the stock’s January highs are well within reach.



    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 upward trend until the beginning of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. It’s easy to see the downward trend the stock has followed for most of this year; however it is also interesting to note that since late June, the stock has shown some resilience, with support in the $69 range and short-term resistance at around $75 per share. The stock would need to push above this range to begin forming a new upward trend, while a drop below $69 could see the stock drop to as low as the $56 level as shown by the 88.6% Fibonacci retracement line.
    • Near-term Keys: The stock would need to break above $75 to give a good bullish signal that you could act on, either for a short-term, momentum-based trade with call options, or to buy the stock outright with a plan to hold for a longer period of time. A drop below $69 could be an opportunity to work the bearish side by shorting the stock or by buying put options.


  • 28 Aug
    Why AT&T really does look like a solid value play

    Why AT&T really does look like a solid value play

    While the tech sector, in a broad sense, has been one of the most stellar performers in the marketplace for the past few years, telecommunications stocks, almost all of which have operations that naturally bleed into many of the same areas as some of the largest tech companies in the world, haven’t followed suit. More →

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