Tariffs

  • 03 Jul
    Want to limit trade war risk? Check out SCS

    Want to limit trade war risk? Check out SCS

    New Trump-imposed tariffs on China, Mexica and Canada are set to take effect at the end of this week, with retaliatory tariffs from those countries on the U.S. scheduled at the same time. The hand-wringing from politicians, talking heads and business experts continues to dominate the headlines, and I expect that the longer it continues, the more the broad market is going to have a hard time finding any really strong bullish momentum. Whether or not that translates to anything approximating a bear market also remains to be seen, no matter what the naysayers claim. Most economists and business executives, on both sides of the argument, do agree that in the long-term a trade war affects all sides negatively. I’ve even heard a few recently refer to an extended trade war as “mutually assured destruction” that will ultimately force all of the countries involved to eventually work out some kind of agreement. How soon will that happen is anybody’s guess, of course, so for the time being expect uncertainty and speculation to keep dominating the headlines and the news wires.

    As an investor, you can use the fact that a lot of companies that could, or will be directly affected by tariffs are likely to see their stocks underperform. In some cases, stocks currently at or near high levels could be pushed much, much lower, and that could create some nice value-oriented opportunities to pay attention to. As a contrarian-minded investor, I like that idea quite a bit, and so I’m watching a lot of those stocks pretty closely. Another smart thing you can do is to try to identify stocks whose actual exposure is likely to be more limited. Steelcase Inc. (SCS) is a stock that has been in business since 1912, but whose small-cap status means you’ve probably never heard of them. Despite that fact, SCS is the world’s largest maker of office furniture and office furniture systems. This is a company with a very good fundamental profile and what I think looks like a great value profile. At its current price, I also think that it represents a low-risk option if you’re looking for a way to invest in a stock that could provide some good long-term growth potential even as the U.S. keeps wrangling with its global trading partners.



    Fundamental and Value Profile

    Steelcase Inc. provides an integrated portfolio of furniture settings, user-centered technologies and interior architectural products. The Company’s segments include Americas, EMEA and Other Category. The Company’s furniture portfolio includes panel-based and freestanding furniture systems and complementary products, such as storage, tables and ergonomic worktools. Its seating products include task chairs, which are ergonomic seating that can be used in collaborative or casual settings and specialty seating for specific vertical markets, such as healthcare and education. Its technology solutions support group collaboration by integrating furniture and technology. Its interior architectural products include full and partial height walls and doors. It also offers services, which include workplace strategy consulting, lease origination services, furniture and asset management and hosted spaces. Its family of brands includes Steelcase, Coalesse, Designtex, PolyVision and Turnstone. SCS has a current market cap of $1.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings have declined while sales increased slightly. Most of the earnings decline was attributed in their last quarterly report to increased commodity costs in the U.S. while most of the increase in sales came from the EMEA (Europe, Middle East, Africa) region, with the greatest portion of overseas growth coming from Germany and the U.K. Revenues from EMEA operations totaled about 18.2% of the company’s total revenues, while the Asia Pacific region contributes less than 15%. The company cites Brexit uncertainty as a risk to its EMEA sales growth. Tariffs on steel and aluminum imports to the U.S. could actually benefit SCS as Canada and China provide most of the international competition in their industry.
    • Free Cash Flow: SCS’ Free Cash Flow is pretty cyclical, and declined almost 50% over the last quarter, but remains generally healthy, with almost $135 million in cash and liquid assets on their balance sheet.
      Debt to Equity: SCS has a debt/equity ratio of .36, which is pretty conservative. Their operating profits are adequate to service their debt, with good liquidity from cash to provide additional stability in this area if necessary.
      Dividend: SCS pays an annual dividend of $.54 per share, which at its current price translates to a dividend yield of 3.89%.
    • 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 SCS is $6.93 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.0. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Office Services & Supplies industry is 1.8, while the historical average for SCS is 2.7. I usually prefer the historical average as a measuring stick, which provides a long-term target price of $18.71. That’s 35% higher than the stock’s current price and would put the stock in the neighborhood of its 2-year high price.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: The stock is hovering near to its 2-year low price and appears to be holding solid support a little above $13 per share. Since October of last year, the stock has traded within a roughly $2 range, with resistance around $15.50 and support as already mentioned around $13. The stock’s highest level is around $18 per share, just a little below the long-term target price the value analysis I referred to in the last section provides. The stock’s all-time high is around $20 and was last reached in late 2015.
    • Near-term Keys: With the stock currently pivoting higher off of support around $13, and resistance likely around $15.50, there is some room for short-term traders to speculate on a bullish move of about $2 in the short-term. That could be a good swing trade using call options or buying the stock outright. If you’re willing to work a longer-term viewpoint, the $18 range is a reasonable level to work with as well. If the stock breaks its support around $13, it should find additional support around $12 per share. Downside risk in either the short-term or the long-term appears to be pretty low, which also means trading opportunities on the bearish side for this stock provide a very low probability of success.


  • 29 Jun
    HON is down 12% from this year’s high. Is it time to buy?

    HON is down 12% from this year’s high. Is it time to buy?

    Honeywell International Inc. (HON) is one of the largest industrial companies in the U.S. They’ve been around for more than a hundred years and have been a component of the S&P 500 index since 1964. This is a bellwether stock with global operations that, like most U.S. companies, has ridden the market’s long-term upward trend to post amazing highs. It hit a low point below $27 in February 2009 but from that point began a steady climb that peaked in January of this year at almost $165 per share. That’s an increase of more than 500% over that period that anybody would have been thrilled to get a piece of. Since that point, however, the stock has dropped back about 12%, which in the longer-term context probably doesn’t sound that alarming. It does, however beg the question: is the run over, or is this just another example of an opportunity to “buy the dip” and ride the next wave?

    Fundamental measurements for this company are, not surprisingly, quite solid in most respects. As I’ll demonstrate below, however, I believe the stock is highly overvalued by most reasonable metrics. Being overvalued by itself doesn’t, of course mean the stock is destined to keep dropping; however when you consider that the stock is down since January, but remains overvalued does suggest there is still plenty of room to keep dropping. Add in to the mix that the company is among the companies that really stand to be negatively impacted by a trade war – they have operations all over the world, with more than 50% of their sales being generated outside the United States. The longer the U.S. and its trading partners remain at odds and choose to escalate trade tensions rather than finding a way to negotiate their way to compromises, the more the risk that companies like HON could see their stock prices continue to fall.



    Fundamental and Value Profile

    Honeywell International Inc. is a technology and manufacturing company. The Company operates through four segments: Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. The Company’s Aerospace segment supplies products, software and services for aircraft and vehicles that it sells to original equipment manufacturers (OEMs) and other customers. The Home and Building Technologies segment provides products, software, solutions and technologies that help owners of homes stay connected and in control of their comfort, security and energy use. The Performance Materials and Technologies segment is engaged in developing and manufacturing materials, process technologies and automation solutions. The Safety and Productivity Solutions segment is engaged in providing products, software and connected solutions to customers that manage productivity, workplace safety and asset performance. HON has a current market cap of $108.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing a little over 17% while sales increased about 9.5%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations.
    • Free Cash Flow: HON has very healthy free cash flow of more than $5.2 billion over the last twelve months. This is a number that has climbed steadily on a yearly basis going all the way back to the last quarter of 2011.
      Debt to Equity: the company’s debt to equity ratio is .72, which is a pretty conservative number. Their balance sheet shows operating are sufficient to service their debt, with plenty of cash and liquid assets to make up any shortfall and provide additional financial flexibility.
    • Dividend: HON pays an annual dividend of $2.98 per share, which at its current price translates to a dividend yield of 2.05%.
    • 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 HON is $23.80 per share. At the stock’s current price, that translates to a Price/Book Ratio of 6.09. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Industrial Conglomerate industry is only 3.7, and even more importantly, the historical average for HON is 4.6. A value at par with the industry average would put the stock at around $88 per share, and at its historical average it would be $109.48. That means that from a value standpoint, the downside risk is either 25% or nearly 40%, depending on which metric you prefer to use. Either way, the stock is clearly overvalued and would be very hard to justify as any kind of value-based investment.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s upward trend trend dating back to October of last year. It is also the basis for calculating the Fibonacci retracement lines on the right side of the chart. The stock has been holding practically on top of the 38.2% retracement line since April, and could be forming a third consecutive pivot low at that level right now. This could mark the beginning of a Triple Bottom formation, which is usually taken as a positive, bullish pattern; however the stock would have to break above the $152 level, which I’ve marked with the dashed yellow line and is which has also been acting as powerful resistance for the the past four months. A break above that level should provide bullish momentum to as far as $165, which is around the stock’s all-time highs. A break below $142, which is where the stock’s current support lies should be taken as a good indication the stock is indeed reversing its long-term upward trend.
    • Near-term Keys: If the stock breaks below $142 as just mentioned, and some of the broader market’s trade war and other global risks remain in place, I believe the stock could easily drop to as low as $128 before finding any kind of significant support. A drop to that level would also translate to a legitimate downward trend that could keep the stock dropping to somewhere between $105 to $110 per share – which would match the current minimum downside risk my earlier value analysis suggests. These could be opportunities for shorting the stock or working with put options. If the stock does recover bullish momentum and manages to break the $152 level, there could be an attractive opportunity to work with the long side by either buying the stock outright or using call options.


  • 19 Jun
    PEP is up more than 10% in the last month; is there any upside left?

    PEP is up more than 10% in the last month; is there any upside left?

    Over the last few years, it seems that an ongoing discussion is the trend away from sugary soft drinks to healthier alternatives – or to snazzier, caffeine-laden energy beverages. That’s a little ironic when you look at the direction of PEP’s long-term trend, which is clearly up over the last five years, but has been showing uncertainty for the past year. More recently, the stock has been rallying from a intermediate, downward trend low at around $96 in early May to about $106 per share. Bullish investors will almost certainly be tempted to look at that rally as a strong indication of a trend reversal, and there do appear to be some signs that could be the case. There are other indicators, however that point in the opposite direction, meaning that bullish investors should be very cautious right now about jumping whole-heartedly into long stock or call option trades.

    PEP is a stock that, besides some of the elements that I’ll outline below, could be negatively impacted by trade tariffs between the U.S. and its trade partners. The recent imposition of tariffs by the Trump administration on steel and aluminum means that one of this business’ core costs is likely to increase for as long as tariffs and trade tensions continue. I think that this is also an example of a business that won’t simply absorb that increase into their existing cost structure, choosing instead to test consumer’s willingness to pay more for their products.



    Fundamental and Value Profile

    PepsiCo, Inc. is a global food and beverage company. The Company’s portfolio of brands includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. The Company operates through six segments: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), North America Beverages (NAB), Latin America, Europe Sub-Saharan Africa (ESSA), and Asia, Middle East and North Africa (AMENA). The FLNA segment includes its branded food and snack businesses in the United States and Canada. The QFNA segment includes its cereal, rice, pasta and other branded food businesses in the United States and Canada. The NAB segment includes its beverage businesses in the United States and Canada. The Latin America segment includes its beverage, food and snack businesses in Latin America. The ESSA segment includes its beverage, food and snack businesses in Europe and Sub-Saharan Africa. The AMENA segment includes its beverage, food and snack businesses in Asia, Middle East and North Africa. PEP has a current market cap of $149.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, sales and earnings both increased only slightly. EPS growth was a little over 2% while sales growth was just higher than 4%. This is reflective, I believe of the general consumer trend I referred to earlier, with a large number of consumer shifting their beverage preferences away from traditional soft drinks.
    • Free Cash Flow: PEP has generally healthy free cash flow of a little over $6 billion over the last twelve months. This number has declined from a mid-2016 high of $ billion, and dropped sharply from the last quarter of 2017 from $7.2 billion. A confirmation of this as a generally negative measurement comes from net income versus revenues, which was 10.7% in September of 2017 but is now just over 7% as the most recent quarter.
    • Debt to Equity: the company’s debt to equity ratio is 2.91, which is high and by most indications would be a warning sign; however it should also be noted that this is pretty consistent with the Beverages industry. The company’s balance sheet indicates operating profits are adequate to service their debt, with more than adequate cash and liquid assets to supplement any operating shortfall.
    • Dividend: PEP pays an annual dividend of $3.71 per share, which translates to an annual yield of 3.5% 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 PEP is $7.75 per share. At the stock’s current price, that translates to a Price/Book Ratio of 13.63. This is almost twice as high as the industry average, which is 7.7, and almost 50% above the stock’s historical average of 9.2. A move to par with the historical average would put the stock’s price just above $70 per share – more than 30% below its current price, and at levels the stock hasn’t seen since late 2012.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: PEP’s rally for the last month is pretty easy to see, and contrasted against the strength of the intermediate downward trend I’ve indicated with the diagonal orange line, would normally look like a breakout and subsequent trend reversal. The diagonal red line, however, traces the stock’s long-term downward trend, which has acted as strong resistance over the last couple of days and could be the mechanism that halts the stock’s short-term momentum. Near-term support (or downside) is back around $96, where the rally started last month, while a break the red trend line, to about $108 could give the room to to only around $113 per share before it finds its nearest support. From the standpoint of reward: risk, for a bullish trader that is only about $7 of upside potential versus nearly $10 of downside risk – hardly worth taking a bullish trade right now.
    • Near-term Keys: I expect geopolitical concerns could continue to weigh on this stock for the time being. If the stock manages to push to $108, I would look for positive momentum to break through the $113 before looking for a bullish trade. On the other hand, given the stock’s current pivot lower off of trend resistance, the time could be optimal right now for a bearish trade, either by shorting the stock or buying a put option.


  • 06 Mar
    Tariffs & Interest Rate Hikes – Does This Mean Doom & Gloom For Stocks?

    Tariffs & Interest Rate Hikes – Does This Mean Doom & Gloom For Stocks?

    • Last week was an eventful week for stocks. Today, we’ll discuss the long term impact of what has been going on.



    Introduction

    So last week was another down week for the S&P 500 and from what’s going on, it looks like it’s something we should get accustomed to. More →

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