Discretionary

  • 13 Dec
    Is LOW cheap enough yet?

    Is LOW cheap enough yet?

    Over the course of this last quarter of the calendar year, one of the areas of the market that has come under the most pressure is the Consumer Discretionary sector. From April until September, this sector was one of the market leaders, as a generally healthy economy drove retail stocks across a range of industries like Kohl’s (KSS), Target Stores (TGT), Home Depot (HD), and Lowe’s Companies, Inc. (LOW) to all-time high levels; but as anxiety about global tariffs combined with questions about whether the economy was finally starting to reach a peak, this sector dropped well into correction territory and is down a little over 12% since the beginning of September.

    Home improvement stocks like HD and LOW seem to be an interesting economic barometer, especially as it relates to consumer-level impact. A healthy economy generally means increasing home ownership, both for new homes as well as existing, older homes. That is usually a good thing for this industry, since homeowners naturally have to spend money to maintain their homes. Another element that plays a role, of course is interest rates.  Low rates not only motivate higher borrowing for mortgages, but also spur increased home improvement sales as consumers spend and borrow money to upgrade and improve existing homes.

    The fact rates have been increasing isn’t a positive for this industry, and in fact is one of the things that I believe have played a role in pushing HD and LOW into bear market territory over the last three months; but recent economic data seems to be giving the market reason to believe that the Fed may slow the pace of interest rate increases. On a historical basis, rates remain relative modest, which means a slower pace, or even a pause in rates could give this industry a boost in 2019. LOW is an interesting company, in the midst of a corporate transformation, with a new management team that is mapping out a new strategy that includes selling non-core businesses, lowering costs and improved store execution. They are down more than 20% over the quarter, which means that the stock is underperforming versus the broader sector and is in bear market territory. There are some interesting fundamental qualities that I think make LOW worth watching; but I’m not sure the long-term outlook for the stock is quite as positive as I would like to see.



    Fundamental and Value Profile

    Lowe’s Companies, Inc. (Lowe’s) is a home improvement company. The Company operates approximately 2,370 home improvement and hardware stores. The Company offers a range of products for maintenance, repair, remodeling and decorating. The Company offers home improvement products in categories, including Lumber and Building Materials; Tools and Hardware; Appliances; Fashion Fixtures; Rough Plumbing and Electrical; Lawn and Garden; Seasonal and Outdoor Living; Paint; Flooring; Millwork, and Kitchens. The Company also supports the communities that focus on K-12 public education and community improvement projects. The Company serves its customers in the United States, Canada and Mexico. LOW’s current market cap is $75.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined about -1%, while sales grew almost 4%. The last quarter didn’t improve the earnings picture, since earnings declined almost -50%, while sales dropped close to -17%. The company operates with a very narrow margin profile that seems to be getting even narrower; Net Income versus Revenues over both the past year was 5.18%, but decline in the most recent quarter at about 3.6%.
    • Free Cash Flow: LOW’s free cash flow is one of most impressive aspects of their fundamental profile, at $5.3 billion. That translates to a Free Cash Flow Yield of 7.2%. Another positive is the fact Free Cash Flow has increased significantly since the beginning of the year, when it was about $4 billion.
    • Debt to Equity: LOW has a debt/equity ratio of 2.68 and makes them one of the most highly leveraged companies in their industry. While their balance sheet indicates operating profits are sufficient to service their debt, liquidity is a question mark; cash is a little over $1.8 billion while long-term debt is almost $14.5 billion.
    • Dividend: LOW pays an annual dividend of $1.92 per share, which translates to a yield of about 2.1%.
    • 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 LOW is only $6.72, and which translates to a Price/Book ratio of 13.76 at the stock’s current price. Their historical average Price/Book ratio is 10.36, which means that even with the stock down 20% since September, it remains almost 25% overvalued right now. The fact is that based on Price/Book ratio, the stock can’t really be considered a good value until it drops to about $55. The last time the stock was in that price range was October of 2014.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: LOW isn’t far from the 52-week lows it established earlier this year in the $81 to $83 price range. The momentum of the stock’s downward trend right now means that the stock would have to break above resistance at $95 to mark any kind of consolidation range right now, with a break above $100 a good technical reference for an actual bullish trend reversal. If the stock breaks below its current pivot support around $86, look for strong consolidation in the $81 to $83 range. A drop below that level would mean the downward trend will likely continue for the foreseeable future, with the next most likely support level around $75. 
    • Near-term Keys: A push above $95 could set up an interesting bullish swing trade using call options, with a near-term target price at around $100. If the stock breaks its current support, you might consider shorting the stock or buying put options with an eye on the stock’s 52-week low around $81 as an exit point for that trade. The fact is that the stock’s value proposition right now just isn’t interesting enough to justify any kind of long-term position on this company. They are interesting potential turnaround story, it is true; but I would prefer to wait to see new management’s strategy paying off in the form of improving general fundamental strength, lower debt levels, and improving Book Value.


  • 07 Dec
    Is TGT a good value play for the holidays?

    Is TGT a good value play for the holidays?

    The numbers from what has come to be accepted as the official beginning of the holiday are in. This year’s Black Friday and Cyber Monday sales figures hit all-time records despite an overall decrease in foot traffic at brick and mortar stores. Online sales on Black Friday actually began on Thanksgiving Day, and by the end of Friday had reached a nearly 24% increase over the previous year at $6.22 billion. Cyber Monday was even bigger, with a total of $7.9 billion. In all, the numbers seem to point to a healthy holiday shopping season. More →

  • 23 Nov
    Happy Black Friday! Which stock is a better value right now – TGT or WMT?

    Happy Black Friday! Which stock is a better value right now – TGT or WMT?

    It’s an annual thing – the day after Thanksgiving marks the official start of the holiday shopping season. Anxious to get a jump on the best deals of the season, shoppers line up outside stores all over the country. It also marks a point in the year when the stock market starts to pay even closer attention to the retail sector than normal. More →

  • 02 Nov
    NTRI surged 9% yesterday after beating earnings – should you jump on board?

    NTRI surged 9% yesterday after beating earnings – should you jump on board?

    So far this week stock market has managed to bounce off of support and rally pretty strongly after touching its lowest point since May on Monday. In the last three days the S&P 500 has rallied about 5% higher, using strong earnings reports as a primary driver, along with optimistic comments from President Trump about the chances of reaching a compromise on trade with China even as his administration has started to plan tariffs on all remaining Chinese imports if talks fail later this month. More →

  • 01 Nov
    Does BBBY’s low Price to Book Value point to big value – or big risk?

    Does BBBY’s low Price to Book Value point to big value – or big risk?

    Some of the first important metrics I learned about when I started studying fundamental and value analysis years ago revolved around identifying how much a stock should be worth versus what it’s current trading price really is. At its core, the principle is simple enough; if the stock is trading lower than what the value of the underlying business is, what you may be looking at is a terrific bargain opportunity. More →

  • 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 →

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