Fundamental Analysis

  • 04 Dec

    CAG looks like a smart value play

    Monday started the week off with a bang, as the Trump administration announced that it had reached an agreement with China to put a temporary pause on the imposition of any new tariffs. The market cheered the news, hopeful that this will be a positive step that creates constructive discussion toward a long-term compromise that works for both countries. That could give the market a pretty good lift in the short-term, but it doesn’t mean that it’s time to jump back into market with both feet yet. I think it’s still smart to be cautious. More →

  • 30 Nov
    Food stocks can be a good defensive play – but FDP is a sucker’s bet

    Food stocks can be a good defensive play – but FDP is a sucker’s bet

    Until the beginning of this week, the market seemed to be getting more and more bearish every day. After watching the major market indices all decline by more than 10% in October, they staged a short-lived rally at the beginning of November, only to turn back again with a resounding series of consecutive down days last week that pushed the market once again into correction territory. This week has seemed like something of a respite as the market has has rallied off of lows only a little above the 52-week bottom it reached in April. That could be a good thing, but it isn’t a given, More →

  • 29 Nov
    What bear market? Transports like KSU are rebounding!

    What bear market? Transports like KSU are rebounding!

    The broad market’s activity since the beginning of October has put a lot of investors on edge. The major market indices all dropped back near to the 52-week lows they set earlier this year and marked a second drop into legitimate correction territory for the year. That has been increasing concern and speculation that the economy and the market could finally be set to turn over and give up the ghost on the longest bull run in recorded history in the United States. More →

  • 28 Nov
    CVS/Aetna deal just got approved – does that make the stock a buy?

    CVS/Aetna deal just got approved – does that make the stock a buy?

    One of the biggest news items of the day yesterday came when CVS Health Corporation (CVS) announced they had received final regulatory approval for their proposed merger with Aetna Inc. (AET). Announced at the end of 2017, this is an intriguing deal, and not just for the massive $77 billion price CVS is paying for the deal that is expected close this week. Combining one of the largest pharmacy companies with another big player in the heath care provider industry offers the promise of a major shift in the way healthcare is offered and delivered in the United States; it certainly seems to put the combined company firmly at the forefront of a change that could leave the rest of both industries scrambling to catch up.

    Earlier this year, pharmacy and healthcare stocks tumbled amid rumors that Amazon (AMZN) was investigating the potential of entering the business as well. That may still happen, and if it does, that should certainly amplify an already highly competitive industry landscape, but a lot of industry reports seem to indicate those fears may be overblown because of the regulatory challenges AMZN would have to hurdle just to make an initial move into the industry. Even if they do, this merger seems like a proactive, forward-looking move by both CVS and AET to set the standard AMZN and every other company is going to have to measure up to.

    CVS is a stock that has performed pretty well this year – especially when you compare it to the performance of the broad market indices. It’s up almost 10% year-to-date, and nearly 13% in the last month alone. It’s fair to say that the biggest piece of that surge has come from enthusiasm about this pending merger; it’s been widely praised by analysts and industry insiders since it was announced. I’ve also seen a lot of analysts labeling the stock as a terrific value, based primarily on forward-looking estimates of what the combined company should be able to do. Some of that makes sense, I suppose; the real problem, of course is that forward-looking estimates are just that, and nothing more. The truth is that integrating two companies is a challenging task – and that is even when the two companies operate within the same market space as usually happens when a merger happens. Merging two companies in related, but completely separate industries is another matter altogether, and so a smooth integration and transition is certainly not a given.

    There is a lot of promise for the future, to be sure, and the fact is that this is a mega-merger between two large cap stocks that are unquestioned leaders in their respective fields. Each company has significant fundamental strengths they bring to the table, and as a combined company, they offer some interesting potential opportunities, such as the expansion of CVS’ existing MinuteClinics to include AET’s clinical capabilities. Those “concept clinics” are expected to start rolling in early 2019, which means investors generally should have almost immediate feedback to work with in trying to analyze the likely success of the merger. What I want to do with today’s post is to consider what folding AET into CVS’s business structure is going to mean from a fundamental point of view, and from there to try to determine if the resulting company is likely to offer a compelling value to work with.

    Fundamental and Value Profile

    CVS Health Corporation, together with its subsidiaries, is an integrated pharmacy healthcare company. The Company provides pharmacy care for the senior community through Omnicare, Inc. (Omnicare) and Omnicare’s long-term care (LTC) operations, which include distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings. It operates through three segments: Pharmacy Services, Retail/LTC and Corporate. The Pharmacy Services Segment provides a range of pharmacy benefit management (PBM) solutions to its clients. As of December 31, 2016, the Retail/LTC Segment included 9,709 retail locations (of which 7,980 were its stores that operated a pharmacy and 1,674 were its pharmacies located within Target Corporation (Target) stores), its online retail pharmacy Websites,, and, 38 onsite pharmacy stores, its long-term care pharmacy operations and its retail healthcare clinics. CVS has a market cap of $81 billion. Aetna Inc. is a diversified healthcare benefits company. The Company operates through three segments: Health Care, Group Insurance and Large Case Pensions. It offers a range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid healthcare management services, Medicare Advantage and Medicare Supplement plans, workers’ compensation administrative services and health information technology (HIT) products and services. The Health Care segment consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis and an employer-funded basis, and emerging businesses products and services. The Group Insurance segment includes group life insurance and group disability products. Its products are offered on an Insured basis. AET has a market cap of about $69.4 billion

    • Earnings and Sales Growth: Over the last twelve months, earnings for CVS increased by about 15%, while sales were mostly flat, increasing about 2%. For AET, earnings increased about 20% in the last year. CVS operates with extremely narrow operating margins, as Net Income was only 1.6% of Revenues for the last twelve months and 2.9% in the last quarter. AET has a wider margin profile, with Net Income that was 5.9% over the last year and 6.4% in the most recent quarter.
    • Free Cash Flow: CVS’s free cash flow is healthy, at about $4.3 billion, while AET’s is more modest, and about $550 million. Both companies have good liquidity, with cash and liquids assets for CVS that totaled $41.6 billion in the most recent quarter, and $9.5 billion for AET over the same period.
    • Debt to Equity: CVS has a debt/equity ratio of 1.66. This is higher than I usually prefer to see, but is primarily attributable to the massive increase in debt the company preemptively took on at the beginning of the year when the merger was first announced. Total long-term debt is $60.7 billion for CVS. AET has $7.7 billion in long-term debt, which is almost $2 billion less than their cash. CVS has also laid out an aggressive debt reduction program that they expect to lower the total debt the combined company will be working with to much more conservative levels early in 2020.
    • Dividend: CVS and AET each pay an annual dividend of $2.00 per share. Whether that means that shareholders in the combined company will get to enjoy receiving a $4 annual dividend remains to be seen; my expectation is that the dividend will remain the same on a per-share basis in order to give the combined company more flexibility in managing their debt service.
    • 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 CVS is $35.97 per share. At CVS’s current price, that translates to a Price/Book ratio of 2.21. The stock’s historical average is 2.48, which offers about a 12% upside from the stock’s current price. There is a more compelling argument to be made for the stock on a Price/Cash Flow basis, since the stock is currently trading more than 35% below that historical average. AET, on the other hand, is overvalued based on both its Price/Book and Price/Cash Flow ratios by anywhere from 5% (slightly overvalued) to 50% (very overvalued). Based strictly off of existing, historical information, I expect the combined company to initially be overvalued.

    Technical Profile

    Here’s a look at CVS’ latest technical chart.


    • Current Price Action/Trends and Pivots: CVS followed the broad market quite a bit lower in October, but rallied back above its early October high before dropping back a bit until late last week. The market’s enthusiasm for the merger is giving the stock a nice boost right now. Resistance is right at $80, which is almost where the stock is sitting right now. Immediate support is around $69. A push above $80, to about $82 (or whatever price its recent high translates to once the merger is completed), would mark a continuation of the stock’s upward trend since August, while a drop below $74 would mark a reversal of that trend, with a break below $69 representing an indication a new bearish trend could see an extended run. AET, not shown here, has a completely different technical picture, since the stock has been following a very impressive upward trend since February of 2016 and has more than doubled in price over that period.
    • Near-term Keys: CVS is a stock that by most measurements would be considered undervalued, while AET is overvalued. It seems apparent that CVS is consciously paying a big premium for this deal. The potential to transform the healthcare industry is a compelling draw, and it’s safe to say that both companies believe they can thrive in that effort by doing it together. Does that make the stock a bargain right now? I think a lot of investors are going to be jumping onto the stock with exactly that expectation, so don’t be surprised if you see the combined company experience a pretty nice rally in the short-term, post-merger period. Over the next few months, I’ll be watching the financial results pretty closely, to see if they seem to line up with the story both companies have been presenting for the last year. No matter which way it goes, this is a deal that could mark a big turning point for both industries.

  • 27 Nov
    KR is a stock that you shouldn’t ignore

    KR is a stock that you shouldn’t ignore

    With market uncertainty increasing, it’s natural to wonder what kind of stocks make the most sense to pay attention to. How do you keep your eyes out for decent opportunities to make your money working for you when the market looks like it could be at a tipping point and broad market is increasing? I think a good approach is to look for conservative opportunities that offer a lower amount of risk than trying to find the next high flyer. That means focusing your attention on segments of the market that should see stable revenue flows, with relatively consistent profit levels even if the economy does in fact reverse and turn bearish.

    One of the areas I really like to work with in these kinds of conditions is Consumer Staples. Food stocks make a lot of sense to me, because even when the economy struggles, consumers are still going to need to put food on their tables. Grocery stores like The Kroger Co. (KR) offer a similar kind of profile.

    KR is an interesting company; they tend to get marginalized a little bit because of competitive pressure from bigger competitors like Walmart (WMT), Target Stores (TGT) and even Amazon (AMZN), but this is a company that has shown a consistent ability over the years to survive and successfully transform itself to stay relevant and maintain its presence. They also don’t mind taking calculated risks by setting their sights on new business streams that they think offer a good opportunity to expand their business. An interesting example of this is the company’s recent introduction of Bromley’s for Men, a line of men’s grooming products, including razors, shaving cream, lotion and face cleansers. It’s a clear play to take a page from stocks that help to stock the store’s shelves, like Proctor & Gamble’s (PG) Gillette brand as well as the shaving clubs that have been seeing an increase in popularity.

    Fundamental and Value Profile

    The Kroger Co. (KR) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a market cap of $23.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by about 5%, while sales were mostly flat, increasing about 1%. In the last quarter, earnings and sales both declined, a fact that has been one of the biggest catalysts for the market to push the stock down off of its recent highs. Management attributed most of that decline to costly store redesign efforts the company has been engaged in for a large percentage of its stores nationwide, but that has been largely completed and that management expects will translate to better bottom-line improvement in the quarters ahead. The company operates with narrow margins, as Net Income was about 3% of Revenues for the last twelve months. This number dropped in the most recent quarter to 1.8%.
    • Free Cash Flow: KR’s free cash flow is healthy, at about $685 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.3 billion in cash and liquid assets, a number that declined from the last quarter but still remains healthy.
    • Debt to Equity: KR has a debt/equity ratio of 1.65. This is higher than I usually prefer to see, but isn’t unusual for Food Retailing stocks. The company’s balance sheet indicates that operating profits are more than adequate to repay their debt. It is also noteworthy that this number dropped in the last quarter from 1.74.
    • Dividend: KR pays an annual dividend of $.56 per share, which translates to a yield of about 1.86% at the stock’s current price. This is roughly inline with the industry average, but a bit below the S&P 500 average of 2.0%.
    • 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 KR is $9.21 per share. At KR’s current price, that translates to a Price/Book ratio of 3.22 at the stock’s current price. The industry average is 3.2, and the stock’s historical average is 5.06. A rally to par with the historical average would put the stock above $46 per share. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: After rebounding from a pivot low in early October at around $27, the stock peaked early this month at around $32 before dropping back to its current range. It looks like it could be hitting another pivot low right now, with a bounce right off of support a little below $30. A push above $33 per share would mark a break above the range the stock has held since September, and could signal a longer upward trend could be building. The stock’s strongest support right now is around $27; a drop below that point could see the stock drop back into the low $20 range it saw earlier in the year.
    • Near-term Keys: If you don’t mind being aggressive, and little bit speculative, there could be an opportunity to buy the stock or work with call options right now, with an eye on the $33 range as a near-term profit target. If the stock breaks down below its immediate support at $29, you could also consider shorting the stock or buying put options with a target low around $27. I think the best opportunity, however lies in the long-term value potential the stock offers, with a pretty conservative profile that I think makes it more conservative, defensive-oriented stock to work with right now.

  • 26 Nov
    HPE could be an interesting tech play for value investors

    HPE could be an interesting tech play for value investors

    Market volatility since the beginning of October has pushed the entire market down near to its 52-week low, which was last seen in April of this year. That broad-based move, which puts the S&P 500 Index back into correction territory, has put a number of sectors near or into their own bear market territory. Tech stock have been some of the biggest headline generators over the last several weeks, and by some measurements could be considered one of the most bearish sectors in the market right now. If you’re focusing on short-term trading strategies, that means that looking for bullish trades on tech stocks is probably a losing game; but if you’re willing to work with a long-term perspective, and to look for stocks that could offer an interesting value proposition, this is a sector whose current bearish momentum could also represent a smart opportunity.

    Some of the questions about the tech sector right now are significant, and I don’t think they are likely to be answered quickly. Trade tensions between the U.S. and China have kept pressure on the sector all year long, and there still doesn’t seem to an end in sight to the pall that has cast on any company with any kind of hint of exposure to that part of the world. Pricing pressures in storage technology – specifically memory and drive storage – attributed to oversupply as well as increasing competition in the segment – are another concern that seems to be having something of a ripple effect on companies that compete in the consumer and enterprise storage space. In a broader sense, some disappointing recent numbers about the latest iPhone release are leading a lot of investors to wonder if that business is recent the limits of its growth potential. Add to those sector-specific questions additional uncertainty about whether the economy’s current health is finally reaching its nadir and could start to taper off, or whether increasing interest rates are finally going to bring the longest period of economic expansion in memory to an end, and it isn’t all that surprising to see the market, and the tech sector specifically, threatening to turn into a more serious downward trend.

    What do you do as an investor to keep your money working for you when the market looks like it could be getting riskier? Some folks prefer to take a completely defensive approach, meaning that they’ll take advantage of every opportunity to close out the long positions they have, and stop taking on new ones, until they see indications that the broad market is starting to stabilize, or even beginning to pick up new bullish momentum. The advantage that approach has is that if you’re right, and the market’s current correction is going to turn into a much longer downward trend, or out right bear market, sitting in cash means that you aren’t going to lose money, while those who do decide to keep their money in the market are much more likely to see the stocks they are holding drop well below the prices they bought them at. Depending on where they got them, a truly extended bear market could mean those stocks could take years to recover back to the levels they were at they got in.

    The disadvantage, however is that sitting in cash means that you have immediately limited the possibility of future growth – at least for as long as you stay in cash. Consider that most savings accounts, CD’s or money markets are offering yields below 3% right now, and that means that the longer you sit in cash, the more you’re really allowing your buying to deteriorate. Keeping your money in the market means that you’re still giving your money a chance to work for you – because it isn’t a given that every stock in the market is going to keep going down, even when the broad is market is overwhelmingly bearish. There are always pockets of opportunity to be found, in every industry and sector of the market.

    When it comes to technology, I like the idea of looking for value in companies whose business model might not put them on the cutting edge of innovation, but does keep them in the segments that are going to keep everything else going. Enterprise technology refers to hardware, software, and technology services and solutions that drive business, and even if the broad economy falters, the truth is that technology’s place in the world’s economic fabric isn’t going away. Hewlett Packard Enterprise Co (HPE) is an example of a company that serves this specific segment, and that I think represents a smart tech play, even if the economy and the broad market turns bearish. The company has an overall solid fundamental profile, and even more importantly, a value proposition that, even with a conservative long-term price target, offers a nice opportunity right now.

    Fundamental and Value Profile

    Hewlett Packard Enterprise Company is a provider of technology solutions. The Company’s segments include: Enterprise Group, Software, Financial Services and Corporate Investments. The Enterprise Group segment provides its customers with the technology infrastructure they need to optimize traditional information technology (IT). The Software segment allows its customers to automate IT operations to simplify, accelerate and secure business prHPEesses and drives the analytics that turn raw data into actionable knowledge. The Financial Services segment enables flexible IT consumption models, financial architectures and customized investment solutions for its customers. The Corporate Investments segment includes Hewlett Packard Labs and certain business incubation projects, among others. HPE has a current market cap of $21.4 billion.

    • Earnings and Sales Growth: Over the past year, earnings increased almost 42%, while sales declined about 5.5%. In the last quarter, earnings increased about 2.9.5%, while sales grew by 4%. The company operates with a margin profile that declined from 10.4% in the past twelve months to 5.8% over the last quarter.
    • Free Cash Flow: HPE’s Free Cash Flow is modest, at about $440 million. On a Free Cash Flow Yield basis, that translates to a mostly unremarkable 2.05%.
    • Debt to Equity: HPE has a debt/equity ratio of .42, which is a conservative number. Their balance sheet shows $5.3 billion in cash against $9.9 billion in long-term debt. Their balance sheet indicates their operating profits are adequate to service their debt, with healthy liquidity as well.
    • Dividend: HPE pays a dividend of $.45 per share, which translates to an annual yield of about 3.09% 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 HPE is $15.94 per share. At HPE’s current price, that translates to a Price/Book Ratio of .91. The stock has actually only been trading publicly for about three years, which means that historical average ratios are less reliable; in this case I like to use the industry average as a reference point. The industry average Price/Book ratio is 2.7 and puts the top end of the stock’s long-term price target at around $43 per share. I think that is an extremely overoptimistic target, given that the stock’s all-time high is only at around $19 per share; however a better measurement comes using the stock’s Price/Cash flow ratio, which is currently trading about 28.5% below the industry average Price/Cash flow ratio. That translates to a more conservative, but still attractive target prices at around $18.50 per share.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: HPE’s downward slide since January is easy to see, with most of the decline seen from its March peak at $19.50 to its July low, which the stock is very near to right now. If the stock breaks below its current support level, which is right around $14.50, it should find its next support between $12.50 and $13 per share. The stock would need to break above $16, to about $16.50, to confirm a reversal of its longer downward trend.
    • Near-term Keys: If you don’t mind being aggressive, and little bit speculative, there could be an opportunity to buy the stock or work with call options if it can bounce of support around $14.50 and push higher. In that case, be ready to take profits quickly between $15.50 and $16 per share. A bearish trade using put options or shorting the stock isn’t really a very practical trade unless it does actually break below its current support to around $14. I believe the best opportunity lies in the stock’s long-term value proposition, but given the overall bearish sentiment in the broad market and the sector, I think the stock could keep dropping, which just means that its value proposition is likely be even more attractive the longer you wait for signs the stock is actually about to reverse its downward trend.

  • 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 →

  • 22 Nov
    Homebuilders are down big this year – does that mean opportunity with stocks like OC?

    Homebuilders are down big this year – does that mean opportunity with stocks like OC?

    Happy Thanksgiving! The holiday is a good opportunity, while the market takes a break from its wild day to day swings of the past six weeks or so, to sit back and think about where there might be some interesting opportunities to be had in the weeks, months, and possibly even years ahead. Despite the angst and worry that has dominated market headlines, centered primarily around continuing trade tension and interest rate fears, the fact remains that the economy for the most part continues to be quite healthy. Despite the general healthy state of the economy, one of the biggest underperforming sectors in the market throughout the year has been homebuilders, including building products companies. More →

  • 21 Nov
    Wait…what? Did Bezos really just say AMZN is doomed to fail?

    Wait…what? Did Bezos really just say AMZN is doomed to fail?

    Last week in Seattle, Amazon (AMZN) held an all-hands company meeting. When asked by an employee about the company’s future, founder and CEO said something that I don’t think most people would expect of any CEO, much less the CEO of one of the most disruptive companies in the world. “Amazon is not too big to fail,” he said. “In fact, I predict one day Amazon will fail. Amazon will go bankrupt.”

    At first glance, his comment seems pretty surprising, especially given the way the company has expanded its presence from a simple online bookseller to a purveyor of just about anything and everything you might be able to imagine. Not content with simply operating as an online retailer, and with establishing a dominating presence, Amazon is one of the most aggressive companies in the world when it comes to identifying opportunities to move into new businesses. No longer just an online retailer, AMZN has really expanded its business model over the past decade or so.

    To keep pace with the tablet market, the company introduced its own line of e-book readers and tablet computers with the Amazon Fire product line. In a move that now seems prescient, in 2006 the company launched Amazon Web Services (AWS), aimed at cloud computing and data services; according to recent reports, they now own about 34% of the U.S. cloud market, putting them firmly in the driver’s seat in that arena. Another smart move was the introduction Amazon Prime in 2005; initially started as a paid membership shipping service, in 2012 it was expanded to include streaming video and music content, and now stands as a strong competitor in the streaming media business with Netflix (NFLX). They also made a big splash last year when they finalized a merger with Whole Foods Market, giving them a foothold in the grocery market that put big-box retailers like Walmart (WMT) and Target Stores (TGT) on edge.

    So why would the CEO of one of the most aggressive and disruptive companies with such a take-no-prisoners attitude about business make such a provocative statement? I think that when you read further, you get a good into the mindset that makes Bezos such an interesting figure in world business. He didn’t just stop at predicting his company’s doom; he expanded the discussion, explaining that large companies generally have lifespans that cover about three decades – not ten or more. 

    How could a company prolong its otherwise inevitable demise? By learning to “obsess over customers,” said Bezos. “If we start to focus on ourselves, instead of focusing on our customers, that will be the beginning of the end.” What I think you see is a glimpse into the mindset of an executive that has grown his company into one of the largest companies in the world by refusing to stand pat – not only by attacking new markets fearlessly and being willing to take big risks, but also by always looking for new ways to make the their customer’s lives better.

    What does this mean for an investor? The stock has been one of the biggest growth stocks of this bull market, increasing in price from a low in late 2008 in the mid-$30 range to a September high above $2,050. Since that high, the stock has dropped a little over 27%. Does this represent an opportunity to buy in at a discount? The problem is that just because a stock may have entered its own bear market territory – and 27% certainly means that bears are running a lot harder right now than bulls with AMZN – it doesn’t automatically mean the stock is a good value. AMZN has some very impressive fundamentals behind it, but as I think you’ll see, the value proposition offers conflicting information that to me translates to an increased level of downside risk.

    Fundamental and Value Profile, Inc. offers a range of products and services through its Websites. The Company operates through three segments: North America, International and Amazon Web Services (AWS). The Company’s products include merchandise and content that it purchases for resale from vendors and those offered by third-party sellers. It also manufactures and sells electronic devices. The Company, through its subsidiary, Whole Foods Market, Inc., offers healthy and organic food and staples across its stores. The Company also offers a range of products like whole trade bananas, organic avocados, organic large brown eggs, organic responsibly-farmed salmon and tilapia, organic baby kale and baby lettuce, animal-welfare-rated 85% lean ground beef, creamy and crunchy almond butter, organic gala and fuji apples, organic rotisserie chicken. AMZN has a current market cap of $731,2 billion.

    • Earnings and Sales Growth: Over the past year, earnings increased a more than 1000%, while sales improved about 29%. Growing earnings faster than sales is hard to do, and generally isn’t sustainable in the long term, but it is also a positive mark of management’s ability to maximize its business operations. In the last quarter, earnings increased about 13.5%, while sales increased nearly 7%. The company operates with a margin profile that improved from 4% in the past twelve months to 5% over the last quarter.
    • Free Cash Flow: AMZN’s Free Cash Flow is more than $15.3 billion, which is impressive in terms of sheer numbers is very impressive, but considered against the scope of the size of their business gives a hint into the narrow room for error AMZN works with. Their Free Cash Flow Yield is a modest 2.07%.
    • Debt to Equity: AMZN has a debt/equity ratio of .63, which is a conservative number. Their balance sheet indicates more than $29.7 billion in cash against $24.6 billion in long-term debt.
    • Dividend: AMZN does not pay a 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 AMZN is $80.01 per share. At the stock’s current price, that translates to a Price/Book Ratio of 18.69. The stock’s historical Price/Book ratio by comparison is 20.56 and puts the top end of the stock’s long-term price target at around $1,645 per share. AMZN may be down since September by more than 27%, but that translates to just about 10% of upside potential. The real conflict comes when you factor in the stock’s Price/Cash Flow ratio, which is trading more than 41.5% above its historical average that puts a contrasting target price at only $882.32 per share.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: AMZN’s downward slide since September is impressive in both its speed and and depth; the strongly bearish momentum certainly also implies that the worst could still be yet to come, with major support for the stock sitting at around $1,400 per share. A drop below that level could see the stock test the $1,300 level, with an even deeper low in the $1,200 level not out of the question. The stock has major resistance at around $1,600 per share and should be expected to act against any kind of sustained rally.
    • Near-term Keys: A short-term bullish trade is very speculative right now, and will continue to be unless the stock can push up to about $1,650 per share. That is a pretty good price level that could signal the long-term downward trend is about to reverse. A much higher probability set up will be seen if the stock breaks down below $1,400 per share. That could provide a good signal to short the stock or start working with put options. The spread between the target prices offered by the Price/Book and the Price/Cash Flow ratios is so extreme that it’s hard to justify the stock as any kind of value-based investment.

  • 20 Nov
    Is AVY another great bargain in the Materials sector?

    Is AVY another great bargain in the Materials sector?

    In yesterday’s post, I wrote about the Materials sector as a segment of the economy that seems have started to attract the interest and attention to institutional investors. Sector rotation is an approach to market analysis that suggests that if you want to find good investments in any market, it’s a good idea to pay attention to where institutions – mutual funds, investment banks, and insurance companies, to name just a few – are putting their money to work for them.  More →

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