Discretionary

  • 16 Oct
    ROST is a market beater – but does that mean you should buy now?

    ROST is a market beater – but does that mean you should buy now?

    One of the most interesting things to me about the stock market is that there really are as many different ways to invest your money as the human brain can imagine. That’s one of the reasons that there are so many different kinds of mutual fund and ETF choices geared for the average investor. One of the reasons that is so interesting is because that reflects another market reality: More →

  • 11 Oct
    SIG: value stock, or value trap?

    SIG: value stock, or value trap?

    Sometimes, answering the question of whether a stock represents a legitimate, attractive value opportunity can be hard to do. A company could be struggling not only to grow its business, but may be forced to restructure its business in a way that makes most of the traditional measurables investors like to use look very unfavorable. More →

  • 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.


  • 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 →

  • 19 Sep
    Retail stocks are up – but there’s a good reason why DDS isn’t following suit

    Retail stocks are up – but there’s a good reason why DDS isn’t following suit

    Perhaps it’s an indication of over-exuberance that the market has lately seemed to just shrug off the latest global trade news. It could also be that investors have come to accept tariff threats and trade tensions as “the new normal.” Either way, it is interesting that while the Trump administration imposed a new set of tariffs on China, the market today decided to use the fact that the tariffs were set at a lower-than-expected 10% instead of the 25% that many had feared as a catalyst to drive higher. More →

  • 13 Sep
    SKX: 38% decline since April just makes the stock more interesting

    SKX: 38% decline since April just makes the stock more interesting

    If you pay much attention to market news, most of the focus revolves around the segments of the economy that are performing the best right now. It’s a classic “follow the herd” mentality that can actually work pretty when the economy is healthy and growing, but it also has its drawbacks. More →

  • 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.


  • 20 Aug
    CCL: take a cruise with a great value stock

    CCL: take a cruise with a great value stock

    Last week, I wrote about Royal Caribbean Cruises (RCL), which has been setting up what looks like a nice value-based opportunity. Today I’m highlighting another stock in the same industry, and one of RCL’s direct competitors, for practically the same reason. Carnival Corporation (CCL) may actually be a better opportunity than RCL for some investors. Based in London, CCL is a bigger company than RCL, with a market cap at around $32 billion, trading at a lower stock price. Like RCL and many stocks in the Leisure & Recreation Services industry, CCL has dropped from a high in late January, but since the beginning of July has begun to show some bullish strength.

    Another factor that can play into CCL’s favor isn’t just its status as a large-cap stock; it also has a very strong fundamental profile, with healthy profit margins, manageable and conservative debt management, and healthy cash flows. More importantly, the value proposition for the stock is very attractive right now. I’ve speculated that the market could be setting up for yet another extension of its long-term trend – what is usually seen as the “last gasp” push before the market finally begins to turn back into legitimate bear market territory. 

    The catch to that opinion is that there is no way to really know when the turn will happen, and those “last gasp” rallies can last as little as a few weeks to several months. If this next rally does materialize, there could still be plenty of upside potential to capture. You want to be selective about what stocks you’re working with, and very conservative about how much of your capital you’re putting into any single position, because at this stage risk management is becoming more and more important every day. That said, CCL is a stock that is worth taking a serious look, and might be a great stock to work with.



    Fundamental and Value Profile

    Carnival Corporation is a leisure travel company. The Company is a cruise company of global cruise guests, and a provider of vacations to all cruise destinations throughout the world. The Company operates in four segments: North America, EAA, Cruise Support and, Tour and Other. The Company’s North America segment includes Carnival Cruise Line, Holland America Line, Princess Cruises (Princess) and Seabourn. The Company’s Cruise Support segment represents certain of its port and related facilities and other services that are provided for the benefit of its cruise brands and Fathom’s selling, general and administrative expenses. Its EAA segment includes AIDA Cruises (AIDA), Costa Cruises (Costa), Cunard, P&O Cruises (Australia), P&O Cruises (the United Kingdom) and ship operations of Fathom. Its Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and three ships that the Company bareboat charter to unaffiliated entities. CCL has a current market cap of about $32 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings have grown almost 31%, while revenues increased about 10.5%. The company’s margin profile shows that Net Income as a percentage of Revenues dropped somewhat from a little over 15% over the last twelve months to almost 13% in the last quarter. That’s not insignificant, but contrasted against the rest of the data we’ll look at, I don’t believe it is a major cause for concern.
    • Free Cash Flow: CCL’s free cash flow is healthy, at more than $2.3 billion. This is a number that has been relatively stable, yet rising slightly, since the second quarter of 2016 from around $2 billion.
    • Dividend: CCL’s annual divided is $2.00 per share and translates to a yield of 3.30% 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 CCL is $45.10 and translates to a Price/Book ratio of 1.34 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.62, which puts a target price for the stock at about $73 per share, or about 20% higher than its current price. It’s also worth noting that Book Value has increased steadily since the first quarter of 2016, despite its slight drop in the last quarter from $45.65. Another element supporting CCL’s undervalued argument is its Price/Cash Flow ratio, which is currently 23% below its historical average. That puts the stock’s target price a little above $74.



    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 January after the stock hit a 52-week high at around $73 per share. The stock is in a strong downward trend from that point, finding a trend low in July at around $56 per share. That’s a total decline up to that point of about 23%, and is one of the first technical indications that while the stock remains much higher than when it started at in 2009 when this bull market started, it could be setting up a nice value play now. The stock’s rally to around $60 as of this writing is evidence the stock’s current downward trend looks set to reverse.
    • Near-term Keys: A break above resistance around $62.50, marked by the 38.2% retracement line would provide good validation that trend reversal is happening, with a good chance of seeing the stock retest its 52-week high around $73 per share. A bullish investor should wait for that break to get in, either by buying the stock outright or by using call options. If the stock breaks below trend support around $56, however, you can assume that the downward trend will continue for the foreseeable future. In that case, the stock could easily drop near to its 2-year lows between $42 and $46 per share – levels last seen in 2016 prior to last year’s extended rally.


  • 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.


  • 23 Jul
    HAS beats Street estimates, but its 12% overnight jump is a Red Herring

    HAS beats Street estimates, but its 12% overnight jump is a Red Herring

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    Before the market opened this morning, toymaker Hasbro, Inc. (HAS) released its report of second quarter results, and the numbers prompted the market to push the stock up in a big way early in the trading session. After closing a little below $94 on Friday, the stock opened Monday’s trading session at nearly $105 per share and pushed as high as $107 in the early hours of the day. The report must have been really great, right? Well, not so fast.

    One of the interesting things about the stock market is watching the way it reacts to company reports. All things being equal, when a company can demonstrate that their business is growing, their stock should go up, and when it is shown that business is contracting, the stock should also go down. Of course, all things are not equal, and that means that the market, being an emotional animal, treats stocks differently. Sometimes the market’s immediate reaction is about something entirely different than whether a company’s business is growing or shrinking. Hasbro’s price action today is a pretty good example.

    Analysts and investors alike like to try to predict what a company’s report is going to look like. They analyze and measure all kinds of information and data and try to make their own educated guesses about what is going to happen. With HAS, one of the factors that everybody has been trying to account for is the effect that the collapse of U.S. toy store Toys ‘R’ Us, which of course was one of the toymaker’s biggest customers would have. Analysts had anticipated a drop in revenue of a little more than 14% versus the same quarter in 2017, and earnings to decline by more than 45%. Revenues actually declined by 7%, less than half of what was expected, and earnings only dropped by about 9.5%. Seeing both of those numbers come in better than expected led the market to respond with high enthusiasm. Clearly, the market seems to be treating the news as an indication that the effect of the liquidation of Toys ‘R’ Us was much less than expected.



    I’m not saying that the news in this case isn’t positive; being able to minimize the impact from a negative event like a major customer’s complete and utter collapse is a mark of strong management. But does it justify sending a stock 12% above its current price in a single day? That’s where my red herring reference comes into play. The market has always seemed to prefer to draw any kind of silver lining it can from news to drive a stock’s price higher, but the problem is that immediate boost often puts average investors at a disadvantage and increases their risk. The people that stand to benefit most clearly from that early surge, of course, are the investors that were already holding shares of the stock; but the probability any chance the stock will keep going up is less likely to be about emotion and more about the stock’s fundamentals.

    One of the short-term risks about jumping into a stock that is making a big overnight jump based on a news headline comes from the size of that overnight jump. If you’re an investor or trader that had the good fortune to buy HAS at any point in the last month or so when the stock was languishing in the $85 to $94 range, seeing the stock jump up more than $10 per share overnight would certainly be exciting; it would also automatically make you think about selling your shares back to the market to lock in that gain. That is exactly what I think a lot of folks are going to be doing in the next day or so; and while it isn’t a given that is going to drive the stock lower, the odds that it will drop are much greater than that it will keep going up. I’ll quantify exactly how much downside risk I think there is in that scenario later in this post. For now, let’s dive in into whether or not the stock should worth the $100-plus share price it carries at the moment.



    Fundamental and Value Profile

    Hasbro, Inc. (HAS) is a play and entertainment company. The Company’s operating segments include the U.S. and Canada, International, and Entertainment and Licensing. From toys and games to content development, including television programming, motion pictures, digital gaming and a consumer products licensing program, Hasbro fulfills the fundamental need for play and connection for children and families around the world. The Company’s U.S. and Canada segment is engaged in the marketing and sale of its products in the United States and Canada. The International segment is engaged in the marketing and sale of the Company’s product categories to retailers and wholesalers in most countries in Europe, Latin and South America, and the Asia Pacific region and through distributors in those countries where it has no direct presence. The Entertainment and Licensing segment includes the Company’s consumer products licensing, digital gaming, television and movie entertainment operations. HAS’ current market cap is $13.3 billion.

    • Earnings and Sales Growth: Over the trailing twelve-month period, earnings declined almost 77% while revenue dropped about 16%. Over the same period, HAS has operated with a very narrow margin profile of less than 5% that was actually negative over the last quarter.
    • Free Cash Flow: HAS’s free cash flow prior to the last quarter was healthy, at about $497 million. The company has about $1.1 billion in cash and liquid assets, a number that declined from almost $1.6 billion in the quarter prior.
    • Debt to Equity: HAS has a debt/equity ratio of .98 as of the quarter prior to today. Total long-term debt in the most recent was about the same, at about $1.64 billion.
    • Dividend: HAS pays an annual dividend of $2.52 per share, which translates to a yield of about 2.36% 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 HAS is $12.58 and translates to a Price/Book ratio of 8.47 at the stock’s current price. That is quite high, well above the industry average of 3.2 and its own historical average of 5.22. A move to par with its historical average would put the stock at about $66 per share – more than 38% below the stock’s current price. I believe this is a pretty fair evaluation of what the stock’s long-term, fair market value should be. For a value-based investor, the stock would have to drop to at least this level before it would merit serious consideration.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: The dotted green line highlights the stock’s upward trend, dating back to early April. The stock has shown good bullish strength from this period, increasing about $10 per share before this morning’s big break higher. I’m using the dotted blue line for a couple of things. First, before today this was the stock’s most likely strong resistance level, and today’s clear break, with a huge gap between Friday’s close and this morning’s opening price above it is a clear technical indication of the stock’s current bullish momentum. The line is also useful when thinking about investor behavior as it relates to overnight gaps. Since gaps like this translates to large, unexpected but happy gains for people who bought in before the jump happened, it isn’t unusual to see an increasing in selling immediately after the gap, as profits are taken and locked in. An abundance of technical study suggests that gaps tend to fill themselves, which means that a bullish gap like the one we’re looking at now is very likely see the stock drop back down in the near term. One technical theory that I think has good anecdotal evidence behind it suggests the stock should fill approximately half of the distance covered by the initial gap. The blue line, sitting right around $99 per share, is right in that price area, and is further bolstered by repeated pivot highs in that same range, in February of this year and multiple points in 2017. That puts the stock’s minimum immediate downside risk in the $6 to $7 per share range now – far above what any near-term upside forecast is likely to be.
    • Near-term Keys: If the stock stabilizes in the $99 to $100 range, that could be a good indication the stock will push back to test the high it set today around $106 per share, which could offer a good signal for a short-term swing trade using call options or buying the stock outright. A break below the $99 support level should put you on notice to watch to see if the stock will find support along its intermediate trend line around $93. A break below that level would mark a reversal of that upward trend, and could easily see the stock drop all the way to the $83 level to test its 52-week low. A break below $93 could offer a nice signal to start working the bearish side of the market by shorting the stock or using put options.


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