• 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.

  • 16 Jul
    COLM makes great products – but buying their stock right now is risky

    COLM makes great products – but buying their stock right now is risky

    One of the best-performing areas of the economy this year is the Consumer Discretionary sector, which for the year is up more than 12%. About half of that move has come since the beginning of May as this sector has been one that has led the market even as uncertainty has pushed other sectors lower or at least into a mostly sideways pattern over the same period. A lot of that move has been driven by mostly positive economic data showing continued low unemployment with gradually increasing income levels as well as increasing consumer confidence. That’s been good news for stocks like Columbia Sportswear Company (COLM). The stock is up 26% year-to-date, and more than 64% over the past year.

    Depending on your perspective, seeing a stock staging such a strong upward trend over the past year can prompt a couple of different ideas. If you use the long-term trend as a primary indication of trade direction, the stock’s current strength should naturally make you think about placing a bullish trade. If you follow a value-based or contrarian approach, the strength of the long-term upward trend should lead you to wonder if the best opportunity has already passed, and if in fact the downside risk right now outweighs any remaining upside potential.

    Based on the company’s most recent earnings report, COLM’s fundamentals are all healthy and seem to indicate not only that business has been growing, but also that it should continue to do so for the foreseeable future. The company’s business is very cyclic in nature, owing to the fact that it so closely tied consumer preferences and trends, as well as to the ebb and flow of seasonal shifts in those trends; even so, over the past year the company has shown strength in just about every important, measurable area. The company itself, however raised a few red flags in its discussion in their report of risks. The fact is that the company manufactures all of its products abroad, using short-term contracts with producers worldwide. Management specifically mentioned concerns about the U.K.’s pending withdrawal from the European Union as well as trade tensions between the U.S. and its trading partners as geopolitical issues that stand to impact them in a negative way.

    Fundamental and Value Profile

    Columbia Sportswear Company is an apparel and footwear company. The Company designs, sources, markets and distributes outdoor lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel, prAna and other brands. Its geographic segments are the United States, Latin America and Asia Pacific (LAAP), Europe, Middle East and Africa (EMEA), and Canada. The Company develops and manages its merchandise in categories, including apparel, accessories and equipment, and footwear. It distributes its products through a mix of wholesale distribution channels, its own direct-to-consumer channels (retail stores and e-commerce), independent distributors and licensees. As of December 31, 2016, its products were sold in approximately 90 countries. In 59 of those countries, it sells to independent distributors to whom it has granted distribution rights. Contract manufacturers located outside the United States manufacture all of its products. COLM has a current market cap of $6.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased impressively, at almost 51%, while sales increased more modestly, at about  12%. Growing earnings faster than sales is difficult, and generally isn’t sustainable in the long term, but it is also a mark of management’s ability to maximize its business operations and manage costs. It should be noted that the company’s Net Income is only about 5% of Revenue, which indicates that they operate with a very narrow margin profile.
    • Free Cash Flow: COLM’s Free Cash Flow is healthy at a little over $278 million. Their available cash and liquid assets has increased over the last two quarter from about $450 million to more than $808 million in the last quarter.
    • Debt to Equity: COLM has a debt/equity ratio of 0; they have little to no long-term debt.
    • Dividend: COLM pays an annual dividend of $.88 per share. At the stock’s current price, that translates to a dividend yield of 0.95%.
    • 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 COLM is $24.16 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.81.  That’s a bit higher than I usually like to see, but the average for the Textiles, Apparel & Luxury Goods industry is 4.4, while the historical average for COLM is 2.5. While the industry average suggests the stock could still offer some more upside, in this case I think the historical average is a stronger indicator. The stock is significantly overvalued, since a drop to par with the average would put the stock a little below $62 per share.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: The 2-year chart here clearly shows the stock’s impressive run since June of last year; the red diagonal line traces the stock’s trend from that point to its recent high at around $94 per share. The stock has been hovering near to, but slightly below that high level for the past month, an indication of consolidation and uncertainty about how much upside the stock has left. In and of itself, that isn’t an indication that the stock is sure to reverse, of course, since the stock could pick up momentum and push higher yet again. However, the red horizontal lines on the right side of the chart, which trace the stock’s current Fibonacci retracement levels, are a good indication of how much technical risk there is right now. If the stock breaks below its current support at around $90, it would likely not find meaningful support before dropping to as low as $78 or $77 per share. If economic conditions begin to deteriorate, an even deeper decline isn’t out of the questions, with the $62 forecast from the stock’s historical Price/Book ratio – a price level the stock last saw in November of last year – clearly within reach.
    • Near-term Keys: For the stock to maintain its longer-term upward trend in the short-term, it would have to break above $95 will considerable buying volume to provide momentum and strength. Far more likely right now is a decline to somewhere between $78 and $80, where the stock could then test the strength of its long-term trend and possibly set up a new bullish trade from a solid retracement pattern. A break below $90 would indicate that test is imminent; it could also provide a short-term, momentum-based bearish trade set up for shorting the stock or working with put options.

  • 12 Jul
    IRBT is setting up for a bullish pop

    IRBT is setting up for a bullish pop

    Despite the uncertainty that has dominated the market for most of the year, its bullish long-term trend remains in place and has continued to provide strong support to mute any drawdown. As of this writing, the S&P 500 Index looks set to push above short-term resistance and could start testing the all-time highs it set back at the beginning of the year. That should be a positive indication for stocks in general, and even while trade war risk persists, there remain interesting opportunities to be had.

    iRobot Corp (IRBT) could be one that is setting up for a good bullish trade right now. The stock’s short-term trend is up about 45% since the beginning of May, with room yet to move up another 15% if its current momentum holds. This is a small-cap stock in the Household Durables industry that is a bit of a niche play; its products won’t appeal to every consumer, but they have a strong, building customer base, and while their focus is primarily geared toward consumer robot use, it includes forward-thinking technologies like mapping, navigation, mobility and artificial intelligence. If you’re a geek like me, you can’t really walk into a Best Buy store without at least checking out the section that includes IRBT’s products, which also means that sooner or later you’re likely to buy one of your own.

    IRBT is another stock in the Household Durables industry that could also provide some protection in the event of a trade war. The company markets their products across the globe, and so incurs some financial risk; however, as of the last quarter, international sales accounted for only about 11% of the company’s total sales. They also manufacture their products entirely within the U.S., relying on international distributors to market and sell the products abroad. What financial risk exists from their international exposure is related primarily to foreign exchange rates above all else. Their last quarterly report indicates they actively use foreign currency forward contracts and swap to hedge and minimize this risk.

    Fundamental and Value Profile

    iRobot Corporation is a consumer robot company, which is engaged in designing and building robots. The Company’s portfolio of solutions features various technologies for the connected home and various concepts in mapping, navigation, mobility and artificial intelligence. The Company sells various products that are designed for use at home. Its consumer products focus on both indoor and outdoor cleaning applications. The Company offers multiple Roomba floor vacuuming robots. Roomba’s design allows it to clean under kick boards, beds and other furniture. It offers the Braava family of automatic floor mopping robots designed for hard surface floors. The Roomba 600 series robots offer a three-stage cleaning system. The iRobot HOME Application helps users to choose cleaning options for their home. Its Mirra Pool Cleaning Robot is used to clean residential pools. The Company’s trademarks include Scooba, ViPR, NorthStar, Create, iAdapt, Aware, Home Base, Looj, Braava, vSLAM and Virtual Wall. IRBT has a current market cap of $2.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 27%, while sales increased nearly 29%. These are healthy numbers that indicate their business is growing aggressively. The company’s margins are a bit narrow at around 5% for the past year, although in the last quarter this number did increase to almost 10%.
    • Free Cash Flow: IRBT’s Free Cash Flow is healthy, and since they have no long-term debt, their operating profits can be directed almost completely to facilitate growth and continued innovation.
    • Debt to Equity: IRBT has a debt/equity ratio of .0, which as already mentioned means they have no long-term debt. Any short-term needs can be covered by their operating profits, along with more than $100 million in cash and liquid assets.
    • Dividend: IRBT does not pay an annual dividend.
    • 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 IRBT is $17.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.58. The average for the Household Durables industry is 5.9, while the historical average for IRBT is only 3.3. Comparing the current Price/Book ratio to its historical average means the stock is overvalued, however in this case the industry average is also constructive. A move to par with the industry average would translate to a stock price of more than $104 dollar per share, which is near an all-time high which the stock reached temporarily a year ago.

    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 decline from its all-time high at nearly $110 per share to its downward trend low in early February around $56. The stock finally picked up enough bullish momentum to sustain a strong upward trend beginning in May, driving from that low point to its current price. Since that time, the stock has moved in a nice stair-step pattern, with a recent pullback to support at around $75 before bouncing higher to its current price. The green horizontal line marks previous pivot points that I think could act as an important test of the upward trend’s longer-term strength if its current bullish momentum tapers off; an upward bounce from that level should provide a good catalyst to keep the stock moving higher. The red horizontal lines on the right side of chart mark Fibonacci retracement levels of the downward trend that could provide resistance to a sustained move higher. If the stock breaks above the most immediate resistance around $83, for example it should easily test its short-term pivot high above $90, with a longer-term target around $103 possible from there.
    • Near-term Keys: Watch the $83 level; a break above that resistance should provide a good signal to enter a bullish trade, either by buying the stock outright or by working with call options. If the stock begins to retrace from its current price, pay attention to support around $72. A bounce higher from that level could also provide a good bullish trading set up at a lower price point. If the stock breaks below $72, on the other hand, the stock’s mostly downward longer-term trend would be reasserting itself, and the stock would likely see little support before dropping back into the $56 to $60 level to retest its 52-weeks lows. That could translate to a decent opportunity if you like working with put options or with short sales.

  • 06 Jul
    The trend is a friend for AEO

    The trend is a friend for AEO

    A popular maxim among technical traders states that “the trend is your friend.” The logic is pretty simple; when you’re trying to decide which way to work with a stock (bearish or bullish), you should use the stock’s trend as your guide. If you’re thinking about taking a position that could cover 3 month’s of time or more, the smart way to apply the rule is use the stock’s long-term trend for that reference.

    This approach works against the mindset of value-oriented and contrarian investors, because it opens up your investment universe to stocks that are already trading at high multiples of the price ratios more conservative methods use. The advantage that it offers, however is pretty simple: just because a stock is already trading at a high level does not automatically mean it is due to reverse and move down. It is also true that in order for a stock to establish a new high, it has to break above its latest high. American Eagle Outfitters, Inc. (AEO) is a great example of a stock that is the midst of a strong, long-term upward trend, and that could be setting up for another strong push even higher.

    The trend for AEO is following a very similar track to the Consumer Discretionary sector in general, which is where this Specialty Retail stock fits. The entire sector has pulled back just a bit from recent peaks over the last week or so, and it is true that it could drop a little further. The strength of that longer trend, however means that the entire sector, and AEO specifically, is more likely in the near future to turn back to the upside and offer investors an opportunity to ride the stock a little further.

    Fundamental and Value Profile

    American Eagle Outfitters, Inc. (AEO Inc.) is a multi-brand specialty retailer. The Company offers a range of apparel and accessories for men and women under the American Eagle Outfitters Brand (AEO Brand), and intimates, apparel and personal care products for women under the Aerie brand. AEO Inc. operates stores in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom. As of January 28, 2017, the Company operated over 1,000 retail stores and online at ae.com and aerie.com in the United States and internationally. Its company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom. Its other brands include Tailgate and Todd Snyder New York. Tailgate is an apparel brand with a college town store concept. Todd Snyder New York is a menswear brand. As of January 28, 2017, the AEO brand operated 943 stores and online at www.ae.com. AEO has a current market cap of $4.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing almost 44%, while sales increased about 8%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations.
    • Free Cash Flow: AEO’s Free Cash Flow is healthy, at a little over $235 million. That number has increased in each of the past three quarters.
    • Debt to Equity: AEO has a debt/equity ratio of 0, which means they carry little to no debt. That fact translates to a much lower level of financial risk for the company than most of its competitors carry. The company has good liquidity, with a little over $309 million in total cash and liquid assets. This also represents a significant improvement over the last year, when cash was around just $190 million.
    • Dividend: AEO pays an annual dividend of $.55 per share, which at its current price translates to a dividend yield of about 2.33%.
    • 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 AEO is $6.84 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.44. The historical average for the stock is only 2.5, suggesting the stock is overvalued by almost 50%, but the average for the Specialty Retail industry is 6.8, which is a reflection of current market conditions, as investors have consistently shown a willingness to price stocks in this industry at high multiples when the opportunity seems right. A target price of $46 per share, which is where the stock would be at par with the industry average, is probably not realistic, considering that its price has never exceeded $32 per share; it does, however suggest that a target somewhere in the $30 to $31 range under current conditions is probably not unreasonable.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: The diagonal blue line traces the stock’s upward trend over the past year, while the dashed red and green lines highlight the narrow trading range the stock has held between $23 and $25 for the past month or so. Don’t be surprised if the stock pushes below its immediate support at $23 to test the long-term trend line’s support somewhere around $21.
    • Near-term Keys: If the stock can find a new surge of bullish momentum, it could break above the stock’s current high, and resistance around $25. That could give way to another surge to the $28 to $30 range. If the stock retraces back to around $21 and then pivots back to the upside, an aggressive trader would be tempted to bet on a resumption of the upward trend, but the higher probability trade would be to wait for a solid break above $25. The stock could break that upward trend line support, and if it goes even further to drop below pivot low support around $19, its next low could be found in the $13 to $14 range.

  • 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.


    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.

  • 08 Nov
    It May Be Time To Switch From Discretionary To Staples

    It May Be Time To Switch From Discretionary To Staples

    • Consumer staples and discretionary stocks have similar valuations, but rising consumer debt suggests rebalancing towards staples is less risky.
    • Staples have better earnings to revenue growth which indicates higher competitiveness and M&A activity in the discretionary sector.
    • In the case of an economic pullback, discretionary stocks would be hit harder as M&A activity will prove too expensive at valuations above 24.


    With most of the earnings in and the S&P 500 down in the last two weeks, it’s good to take a look at the consumer goods sector to find potential defensive investments. The iShares Consumer Goods ETF (NYSEARCA: IYK) has enjoyed a wonderful run in the past 7 years. More →