Risk

  • 26 Oct
    MORN: analyzing the stock that analyzes the market

    MORN: analyzing the stock that analyzes the market

    Wednesday after the market closed, Morningstar Inc. (MORN) released its latest quarterly earnings report. The numbers were good, and even beat most analyst estimates. Yesterday the market used that earnings beat to drive the stock up almost 14% in a single session – a move that naturally would make anybody that follows the market sit up and pay attention. Is the surge the first indication of a larger rally for the stock to new all-time highs? Maybe – more than one analyst report seems to think that while the stock is highly valued by most standard measurements, the high price is justified by a number of impressive fundamental metrics. I’m less convinced – not because the fundamentals are bad, but because I think betting on a stock that is only a little over 5% away from its recent all-time high under current market conditions is a very dangerous gamble.

    If you’ve been following the stock market for a while, either for stock trading or mutual fund investment, and you’ve spent any time doing your analysis, it’s a good bet that you’ve used MORN’s data. This is a company that was started in 1984 out of the basement of their current CEO with the mission to make stock market data, which up to that point was reserved practically exclusively for brokerages, investment banks and other institutional investors, more accessible to the average, everyday investor. Since that point, the company has grown into a $5.6 billion investment research company with operations all over the world. They operate in the same space as other, larger and perhaps more recognizable names including Moody’s, Standard & Poor’s, and Thomson Reuters – though with an admittedly different focus than most of those companies, whose primary market is on the institutional side. It is a bit of a twist to turn the analysis lens on one of the companies that investors like you and me rely on to analyze the rest of the market, but they are a publicly traded company, and that means that they deserve as much consideration as an investment alternative as any other stock.

    The Capital Markets industry is an interesting segment of the Financial sector, and the Professional Information Services segment is an area that should generally be less subject to economic cyclicality than other Financial stocks – especially those with significant interest rate exposure. The reason that is true is that the longer bull markets and economic expansion lasts, the more passive most people get about paying attention to the market; they tend to buy into the idea that the market is an easy place to make money and that all you have to do is “buy and hold.” When the economy contracts, or moves into recession, and the stock market follows suit, most of those lazy, passive investors get shaken out of the market, leaving the ones that are willing to take the time to do their homework. That is when information services like MORN’s offerings become more and more valuable to the motivated everyday investor. That is another reason I’m interested in seeing how this stock measures up – if the market is indeed at a tipping point, this might be a stock that may hold up better than most.



    Fundamental and Value Profile

    Morningstar, Inc. is a provider of independent investment research in North America, Europe, Australia, and Asia. The Company focuses to create products that help investors reach their financial goals. It offers a range of data, software, research, and investment management offerings for financial advisors, asset managers, sponsors, and individual investors. It provides data and research insights on a range of investment offerings, including managed investment products, listed companies, capital markets, and real-time global market data. It conducts its business operations outside of the United States through subsidiaries in countries, including Australia, Brazil, Canada, Chile, Denmark, France, Germany, India, Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, People’s Republic of China (both Hong Kong and the mainland), Singapore, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, the United Arab Emirates, and the United Kingdom. MORN’s current market cap is $5.6 billion.

    • Earnings and Sales Growth: Earnings and sales growth is very strong; over the last twelve months, MORN’s earnings grew 49%, while revenues increased about 10%. In the last quarter, earnings growth was nearly 35%, while sales growth was modest, at about 3.66%. Growing earnings faster than sales isn’t easy to do, and generally isn’t sustainable in the long-term; however it is also a positive mark of management’s ability to maximize its business operations. The company also operates with a very impressive margin profile, since Net Income over the last twelve months as of the end of the third quarter was almost 15.6%, and actually increased slightly in the third quarter to 16.5%.
    • Free Cash Flow: MORN’s free cash flow is healthy, at more than $207 million for the last twelve months as of the third quarter of the year. This number has also increased steadily over the past year.
    • Debt to Equity: MORN has a debt/equity ratio of .14. This number is very low, and reflects a conservative management philosophy about its use of leverage. The company also has excellent liquidity, with more than $351 million in cash and liquid assets against only $125 million in long-term debt.
    • Dividend: MORN pays an annual dividend of $1.00 per share, which translates to a yield of only .76% 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 MORN is $20.44 per share and translates to a Price/Book ratio of 6.39 at the stock’s current price. This is where the cracks start to show up in the argument for thinking about the stock as any kind of a bargain; the stock’s historical Price/Book ratio is only 4.82, suggesting that stock is almost 25% overvalued right now. Price/Cash Flow analysis makes the value picture look even worse, since the stock is currently trading 34% above that historical average. That means that the baseline “fair value” for the stock is anywhere from $86 to $98 per share. That’s not talking about the bargain price, mind you – that’s just the price range where most value-oriented investors would concede represents a fair value for the stock under normal market conditions.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The chart above outlines the stock’s movement over the past year. Its upward trend until the beginning of September was very impressive – but so was the stock pullback from an all-time high price at around $144 per share leading into yesterday’s trading session. The stock actually covered more than half of the distance of that pullback in a single day on Thursday; the question that is hard to determine is what that outsized surge means. Conventional momentum analysis suggests the stock should follow that surge in momentum to keep driving towards the stock’s all time high; but such an atypical move also makes it quite like the stock could follow the same pattern that often happens when a stock gaps significantly away from its last closing price on an overnight basis. Most technical traders in that case would assume the stock would move back against that gap by at least half the size of the gap. That idea suggests the short-term momentum in this stock could easily translate to at least $7 of immediate downside risk.
    • Near-term Keys: The smart approach right now if you want to work any kind of short-term trade on this stock would be to wait for a day or two to let the stock start to develop a pattern away from Thursday’s massive move. If the stock pushes above Thursday’s closing price, the chances are pretty good the stock could push up to test near-term resistance between $135 and $139 per share – which might be a workable range for a short-term bullish momentum trade using call options or buying the stock outright. If the stock retreats off of Thursday’s closing price, however, don’t be surprised to see the stock drop back down into the mid-$120 level at least – that could be an opportunity to buy options with a target between $123 and $125 per share. Short-term, momentum-based trades are really the only practical way to work with this stock right now, since the overall long-term upside is limited by the stock’s all-time high at $144 and its incredibly overvalued status right now.


  • 24 Oct
    What is a good price for CAT?

    What is a good price for CAT?

    Yesterday marked another volatile day in the stock market, as the major indices posted big losses during the trading session – the Dow, for example bottomed out about 500 points below Monday’s close – but managed to claw back late to finish about .5% lower for the day. The market was chewing on a new round of earnings reports to mixed results. Caterpillar Inc. (CAT) was one of the biggest losers on the day, plunging more than 7.5% following its earnings report. More →

  • 23 Oct
    GILD is deeply undervalued – it it a good play in the current market?

    GILD is deeply undervalued – it it a good play in the current market?

    One of the legitimate challenges any investor faces when market tension is increasing is how far do you go to keep buying stocks when the market looks more and more like it could be reaching the kind of “sea change” turning point that could mark the beginning of a new bear market. There really isn’t a single correct, or best answer to that question; some of the most famous and successful value investors in the market, including Warren Buffett are well-known to keep buying stocks even when the rest of the market is actually going down. More →

  • 22 Oct
    CLX: high dividend, but is it a good value?

    CLX: high dividend, but is it a good value?

    As the market has become more and more uncertain throughout this year, I’ve written more frequently about taking a more conservative, “defensive” approach to investing. There are a lot of different ways to think about being defensive when you believe market conditions are becoming more bearish. More →

  • 19 Oct
    Want to get defensive? Stay away from this value trap

    Want to get defensive? Stay away from this value trap

    The market’s volatility over the last week and a half has started to put a lot of people on edge. I’ve noticed an increasing number of talking heads on market media starting to throw out words that just don’t apply to the market yet, like “correction” and even “bear market” in a few cases. It’s pretty easy to get caught up in the hand-wringing and anxious nerves that always seem come when market volatility starts to pick up. More →

  • 18 Oct
    DLB is a great stock at a high price: how to play it in today’s market

    DLB is a great stock at a high price: how to play it in today’s market

    Warren Buffett is the living gold standard of value investors today; practically every different approach to determining how much a stock should be worth borrows from some element of the methods Mr. Buffett has employed in building his wealth and reputation over the course of decades. More →

  • 17 Oct
    The small cap stock you’ve never heard of – but that could be the best bargain in the Materials sector

    The small cap stock you’ve never heard of – but that could be the best bargain in the Materials sector

    Since hitting an all-time early this year, the Materials sector has seen some of the biggest declines in the broad market. And even while today marked a big surge in price for practically every economic sector, Materials still dropped, putting their decline since late January at about -16% and nearly -11.5% year-to-date as measured by the SPDR S&P 500 Materials ETF (XLB). More →

  • 15 Oct
    TR makes tasty treats – their stock could be one, too

    TR makes tasty treats – their stock could be one, too


    More than two decades ago, I was just getting my start in the financial industry, working as a licensed representative for a major mutual fund company. In order to help new hires like me get more familiar with what mutual funds were about, and to start learning how the stock market worked, my employer encouraged studying the investment philosophies of a lot of the most well-known fund managers of the day. At the time, that meant paying attention to the “rock stars” of the mutual fund industry, and at that time there weren’t too many more popular or well-known names than Peter Lynch. 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 →

  • 10 Oct
    Is SJM undervalued enough to be a smart defensive investment?

    Is SJM undervalued enough to be a smart defensive investment?

    Over the last week, uncertainty appears to have become the primary theme of the market, as concerns over interest rates and global growth are starting to take hold and lead investors to question the market’s ability to sustain its long, bullish trend. As of this writing, in fact, the S&P 500 is sitting right on top of its 50-day moving average line, an indicator that a lot of technical investors like to use as a visual queue for the market’s intermediate-term trend. A break below this line could signal at least a short-term reversal, with more downside ahead that could see the market drop as much as another 4% before finding its next support level. That’s not exactly correction territory, but it is enough short-term downside to keep uncertainty high and prompt investors to start looking for “safe haven” investments that offer some measure of protection should things get even worse.

    If the market keeps dropping, I think there could be some very interesting opportunities in defensive industries, and as I wrote yesterday, I think some of the best valuations in the market right now are coming in the consumer sSJMles sector in general, and the food industry in particular. If you’re looking to be conservative about the positions you take, it’s smart to be selective about how many stocks you buy in a single industry, and so even though I’ve been highlighting different stocks in the industry that I think offer interesting value propositions, you should take some time to compare each one carefully and decide for yourself which ones you think would offer you the right mix of opportunity, fundamental strength, and risk management.

    One food company that I do think is really interesting right now is The J.M. Smucker Company (SJM). The name probably makes you think about the same products I do – fruit spreads. That’s because the company’s namesake Smucker’s brand is the #1 fruit spread brand; but this is a company that also owns the leading peanut butter (JIF), coffee (Folger’s), and dog snack (Milk-Bone) brands. When you consider they own other well-known brands like Crisco, Dunkin’ Donuts, Kibbles ’n Bits, and Carnation, to name just a few, you have a company with a pretty well-diversified product line that covers a pretty broad spectrum of the packages food industry. There are some risks about the food industry that have started to impact some important measurable components of SJM’s profile; however for the most part, this is a company with strong fundamentals, including good cash flow, decent (albeit declining) margins, and manageable debt. They also carry a very attractive dividend yield right now, with a very compelling long-term value proposition. Let’s take a look.



    Fundamental and Value Profile

    The J. M. Smucker Company is a manufacturer and marketer of branded food and beverage products and pet food and pet snacks in North America. The Company’s segments include U.S. Retail Coffee, U.S. Retail Consumer Foods, U.S. Retail Pet Foods, and International and Foodservice. The Company’s U.S. retail market segments consist of the sale of branded food products to consumers through retail outlets in North America. In the U.S. retail market segments, the Company’s products are sold to food retailers, food wholesalers, drug stores, club stores, mass merchandisers, discount and dollar stores, military commissaries, natural foods stores and distributors, and pet specialty stores. In International and Foodservice, the Company’s products are distributed domestically and in foreign countries through retail channels and foodservice distributors and operators, such as restaurants, lodging, schools and universities, healthcare operators.SJM’s current market cap is $11.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 18%, while sales growth increasing not quite 9%. Growing earnings faster than sales is difficult to do, and in the long-term generally isn’t sustainable, but it is also a positive mark of management’s ability to maximize business operations. In the last quarter, earnings decreased almost 7%, despite an increase in sales of almost 7%. That points to increasing costs, which right now are coming from from foodstuffs as well as transportation costs. This reality is also reflected in SJM’s margin profile; over the last twelve months, Net Income was nearly 18% of Revenues, but declined in the last quarter to about 7%. That is a red flag, but the company’s balance sheet indicates that their margins remain adequate.
    • Free Cash Flow: SJM’s free cash flow is good, at a little over $800 million for the trailing twelve month period; that translates to a Free Cash Flow yield of about 7%.
    • Debt to Equity: SJM has a debt/equity ratio of .78, a relatively low number that indicates the company operates with a generally conservative philosophy about leverage. This number did increase significantly in the last quarter from .59, which I believe is a reflection of their acquisition of pet food company Ainsworth in May of this year for $1.7 billion. In the last quarter, their long-term debt increased from about about $4.7 billion to almost $6.2 billion, suggesting the larger portion of the purchase was financed by debt.
    • Dividend: SJM pays an annual dividend of $3.40 per share, which translates to a yield of 3.33% 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 SJM is $69.72 per share and translates to a Price/Book ratio of 1.46 at the stock’s current price. Their historical Price/Book average is 2.04, which suggests that the stock is trading at a discount right now of about 39.5%. Their Price/Cash Flow ratio offers an even more optimistic perspective, since it is currently running 62% below its historical averages. Between the two measurements, the long-term target price, based strictly off of value analysis could lie anywhere in a range between $142 and $165 per share. The low end of that range was last seen in the early spring of 2017.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The chart above traces the stock’s downward trend from late April of 2017, where it peaked at around $144 per share, to its trend low point at close to $100. It also informs the Fibonacci retracement lines shown on the right-hand side of the chart. The stock is currently sitting near that trend low, with strong support at that point from previous pivot lows in November 2017 and June of this year. The stock is about 15% below the resistance marked by the 38.2% Fibonacci retracement line, so a bounce higher off of support could see the stock revisit that level fairly quickly. A break below current support at around $100 could give the stock additional room to drop to multi-year lows that may not find support until around $90 per share – a level last seen in early 2013.
    • Near-term Keys: A strong bullish pivot from the stock’s current support level could be taken as a good signal for a short-term bullish trade using call options or even buying the stock, with a near-term target between $110 and $115 per share. The strength of the stock’s downward trend, however could push the stock below its current support at $100, which would be a strong indication to consider shorting the stock or working with put options. Given the stock’s valuation measurements and general fundamental strength, including a very healthy dividend, the current price represents a very impressive bargain if you’re working with a long-term time horizon and don’t mind accepting some nearer-term price volatility.


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