Activists

  • 22 Jun
    Is NWL’s stock depressed, or undervalued?

    Is NWL’s stock depressed, or undervalued?

    One of the things that has marked this bull market since 2009 has been the role the Federal Reserve has played in facilitating the economy. Even as the Fed has begun raising rates while also working to reduce its balance sheet, it has made a point of taking a gradual, incremental approach that is designed to strike a balance between encouraging growth and preventing it from going too fast. 

    One of the normal benchmarks the Fed and most analysts use to gauge economic activity is the Consumer Price Index (CPI). The complete index covers all items that you and I purchase, including food and energy products. Since those items – groceries, gasoline, and so on – tend to be less cyclical in nature, a second measurement excludes those items. The Fed has previously indicated it is using annualized growth in this number of 2% on average as its target for healthy economic growth. As of the last report, published in May, CPI (less food and energy) growth for the trailing twelve months was 2.2% – somewhat higher than the Fed’s target, but generally within the range it has indicated it is willing to keep working with. The implication is that the economy is growing at a modest pace that should be sustainable for the time being.

    There are always risks to economic growth, no matter what the numbers say. Geopolitical issues have a way of increasing concerns and worries in a way that can bleed into consumer habits and trends. Trade tensions between the U.S. and China, Europe, Mexica and Canada could certainly result in an increase in the prices of practically every type of consumer goods, no matter how much the Trump administration asserts that tariffs imposed up to this point are being intentionally structured to shield consumers.



    In the case of Newell Brands Inc. (NWL), the stock’s price trend over the last year is also symptomatic of additional risks tied to the company. Over the past year, sales have declined while earnings have been flat. The trend for both of these items is on the decline, however, as earnings in the most recent quarter decreased 50% versus the quarter prior to it, while sales decreased by more than 19% over the same period. Not only is this pattern in direct contrast to the generalized economic growth I just described using the CPI, it also runs counter to the industry trend, where earnings have generally grown. NWL’s stock has suffered, declining from a high near to $55 in June of last year to the stock’s current price around $26.

    Another indication to the average investor that all may not be great at NWL is the fact that activist investor Carl Icahn several months ago began quietly acquiring a large enough stake in the company to begin agitating for change. That led the company to forge an agreement with Icahn and fellow Starboard Value, an activist hedge fund, that allowed them to nominate five of their own people to Newell’s board. Activist investors generally get involved with a business when they see opportunities to change the business model, and that can be a good thing; but it generally doesn’t happen when everything is going well.

    Value-oriented investors can look to a few critical fundamental items that could indicate the stock is a very good bargain right now; and frankly that is part of the reason that investors like Icahn and Starboard get involved. If you think these activist investors can be successful in transforming NWL’s business, getting in right now could be a good opportunity. A successful turnaround, however is never a given, and the result they are working for could require a very long-term perspective on your investment. If you’re looking to make a quick buck with a profitable short-term trade, NWL probably represents a high-risk, low-probability investment right now.



    Fundamental and Value Profile

    Newell Brands Inc. is a marketer of consumer and commercial products. The Company’s segments include Writing, Home Solutions, Commercial Products, Baby & Parenting, Branded Consumables, Consumer Solutions, Outdoor Solutions and Process Solutions. Its products are marketed under a portfolio of brands, including Paper Mate, Sharpie, Dymo, Expo, Parker, Elmer’s, Coleman, Jostens, Marmot, Rawlings, Mr. Coffee, Rubbermaid Commercial Products, Graco, Baby Jogger, NUK, Calphalon, Rubbermaid, Contigo, First Alert, Waddington and Yankee Candle. Writing segment consists of the Writing and Creative Expression business. Home Solutions segment designs, manufactures or sources and distributes a range of consumer products under various brand names. Commercial Products segment designs, manufactures or sources and distributes cleaning and refuse products. Its Baby & Parenting segment designs and distributes infant and juvenile products. NWL has a current market cap of $12.8 billion.

    Earnings and Sales Growth: As already observed, over the last twelve months, earnings were flat, while sales declined. Most analysts forecast a further decline in sales and earnings through 2018 of about 3 to 3.5%.

    Free Cash Flow: NWL has generally healthy free cash flow of a little over $418 million over the last twelve months. This number has decreased since the beginning of 2017, when it was a little above $1.8 billion, which could be taken as an additional red flag.

    Debt to Equity: the company’s debt to equity ratio is .68, a conservative, generally manageable number that has declined from a little above 1 in the middle of 2016. The company’s balance sheet indicates their operating profits are more than sufficient to service their debt.

    Dividend: NWL pays an annual dividend of $.92 per share, which translates to an annual yield of 3.49% 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 NWL is $29.20 per share. At the stock’s current price, that translates to a Price/Book Ratio of .9. A Price/Book ratio below is usually a good sign for a value investor, and comparing it to its historical average of 4.4 suggests that the long-term opportunity could be enticing. A rally to above $100 per share, which would have to happen for the stock to approach its historical Price/Book average is unlikely given that the stock has never risen above about $56 per share; but it does suggest those historical highs are within reach. If you believe in Icahn’s and Starboard’s methods for “enhancing shareholder value,” this is as clear an indication of where the opportunity lies as any.



    Technical Profile

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

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    Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s downward trend since July of last year. While that trend hasn’t reversed, it has lost its bearish momentum, since the stock has been hovering in a very narrow range since February, with support in the $25 range and resistance around $28 per share. The interesting thing about sideways trends like the one illustrated by the horizontal, dotted red and blue lines is that the longer they last, the more likely a major trend reversal becomes. For the impatient, short-term investor, that doesn’t inspire a lot of enthusiasm, but for long-term oriented investors looking for bargain opportunities, this is a very attractive technical setup.

    Near-term Keys: The bullish case is pretty simple to make. A break to $29 per share will require significant upward pressure and momentum; if and when it happens, the stock could easily move into the $39 to $40 range within a matter of weeks. That break would mark the earliest sign of a major trend reversal and would provide an optimal bullish entry point for trend or swing traders. If you are a value-oriented investor with a long-term time frame, and don’t mind waiting for the break, or even to endure a little more negative price pressure in favor of the long-term view, this could be an excellent time to consider taking a position. If the stock breaks its support in the $25 range, there is about $7 of downside risk to be aware of before the stock is likely to find additional support. That could also translate to a decent short-term opportunity for a short sale or a bearish put option trade.


  • 23 Nov
    How To Make Activist Investors Work For You

    How To Make Activist Investors Work For You

    • We’ll analyze the scientific data that explains how activists effect returns.
    • Activism increases returns, but you can increase your returns without paying the 2/20 fees.
    • There is enough time from the first activist announcement to actual fundamentals improving to carefully analyze the investment and make an appropriate decision.

    Activist Investors

    Activists open a position in a company that is large enough to enable putting pressure on management, more often than not in a public way. They put pressure on management because they believe that the company is mismanaged and value can be unlocked through changes in corporate policies, acquisitions, divestments, better use of cash, larger dividends, cost-cutting, better financing options, etc. More →