Valuations

  • 30 Oct
    The market is beating up transport stocks – but that also creates opportunity

    The market is beating up transport stocks – but that also creates opportunity

    Back in July, I wrote about Kansas City Southern (KSU), a mid-cap railroad company that isn’t extremely well-known outside of its normal operating region. Transportation stocks were a good bet throughout the summer, but as fall set in, the market has pushed the Dow Transportation Average down a little over 14% since early September. For KSU, who is the smallest Class 1 railroad in the United States, that broader industry decline has translated to a decline in its price as of this writing of almost 18%. More →

  • 29 Oct
    Dogs of the S&P 500? These 3 stocks crashed 20% or more this week but could be good values now

    Dogs of the S&P 500? These 3 stocks crashed 20% or more this week but could be good values now

    The market closed a volatile week with yet another selloff on Friday, and has managed to push both the S&P 500 as well as the Dow Jones Industrial Average nearly into correction territory with the NASDAQ 100. Along the way, investors, analysts and experts everywhere are now asking the question about where the market is going to go from here. Days where the Dow moves 300 points or more in a single day have seemingly been the norm over the last couple of weeks, and that is something that makes the market a hard place for most investors to keep up with. More →

  • 25 Oct
    Fundamental strength alone isn’t enough to make TXN a good buy right now

    Fundamental strength alone isn’t enough to make TXN a good buy right now

    The last couple of weeks have seen market volatility return in a big way, and with it fear seems to be increasing quite a bit this week. I think part of it is because investors are starting to realize how close the market is right now to an important inflection point. As of yesterday’s close, the tech-dominated NASDAQ had officially dropped more than 10% below its last all-time high, which was reached back in late August. To add insult to injury, both the Dow and the S7P 500 have given back almost all of the gains they’ve achieved since the last correction that ended in March of this year, and are now slightly lower for the entire year. More →

  • 16 Oct
    ROST is a market beater – but does that mean you should buy now?

    ROST is a market beater – but does that mean you should buy now?

    One of the most interesting things to me about the stock market is that there really are as many different ways to invest your money as the human brain can imagine. That’s one of the reasons that there are so many different kinds of mutual fund and ETF choices geared for the average investor. One of the reasons that is so interesting is because that reflects another market reality: More →

  • 12 Oct
    These 2 sectors have taken the biggest beating from the latest market rout

    These 2 sectors have taken the biggest beating from the latest market rout

    There’s really nothing like a little bit of volatility in the stock market to make people sit up and take notice. Whether you’re a seasoned, everyday investor or a relative neophyte putting a couple of hundred dollars each month into a 401(k) account, the last couple of days have prompted just about anybody that is trying to make their money work for them with the stock market wonder what is going on. More →

  • 09 Oct
    Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

    Interest rate fears are making the market jittery – that could be a good thing for defensive stocks like TAP

    Over the last few days, one of the things that has put the market a little bit on edge is concern that interest rates could be forced higher sooner than possible. Fed chair Jay Powell gave investors room to start feeling anxious last week when during a televised question and answer session, More →

  • 28 Sep
    Which auto stock is a better investment right now: FCAU, GM or F?

    Which auto stock is a better investment right now: FCAU, GM or F?

    Earlier this week, I wrote about recent opinions I’ve seen that suggest that the stock market’s long, extended bullish run still has plenty of life left to keep going. One of the most compelling arguments supporting that opinion is the fact that, after the market’s big correction in the early part of this year, most of the market’s recovery has been led by beaten-down stocks in previously under-appreciated and oversold industries. That suggests the bullish momentum that has pushed the market higher since April when it found a corrective bottom is driven by an emphasis on value, which does offer some very compelling food for thought. Value-driven market rotation usually happens at the beginning of a bull market, not in the latter stages of one, so I think there could more than a little truth behind the notion.

    Let’s go ahead assume for the time being that this idea is correct; it begs the next question, which is naturally, where am I going to find the best values in the market right now? It’s one thing to tell you to look for beaten-down stocks in depressed industries; it’s quite another to actually recognize what some of those areas of the market are right now.



    As I previously mentioned, the auto industry is an area of the market that has really come under a lot of pressure. While the broad market has seen a nice rally since April of this year, the Big Three automakers have all seen significant drops in price. Fiat Chrysler Automotive (FCAU), Ford Motor Company (F) and General Motors Company (GM) are all down around 25% since reversing lower from their respective high points in April and June. Yes, a not-insignificant part of that drop has been driven by trade-related tensions with all four of America’s largest trading partners, and for as long as those tensions persist, there remains an element of risk that could keep pushing these stocks lower. Even so, the fact they are all down in bear market territory should at least have any sensible value-oriented investor sit up, take notice, and consider whether there is an opportunity worth thinking about.

    What follows is a comparison of all of the Big Three U.S. automakers, side by side, to determine which of the three actually poses the best value-based argument right now. Does that mean that you should think about taking a position in the winner right now? That is for you to decide.



    Earnings/Sales Growth

    • Ford: Over the last twelve months, earnings decreased by almost 52% while sales were mostly flat, declining by only about 2%. The company operates with a narrow margin profile that saw Net Income at 4.2% of Revenues over the last twelve months, and decreased to only about 2.7% in the last quarter.
    • GM: The twelve-month pattern for GM shows earnings decreasing only a little over 4%, and sales mostly flat, declining about .6%. GM’s margin profile over the last twelve months showed Net Income was a negative 3.2%, but improved in the last quarter to positive 6.5%.
    • Fiat Chrysler: Earnings over the last twelve months declined 2.63% for FCAU versus sales growth of 12.62%. The company’s margin profile showed Net Income as 3.1% of Revenues in the last twelve months, and declining to 2.5% for the most recent quarter.

    Winner: FCAU, on the basis of superior earnings and sales results in the last year versus F or GM.

    Free Cash Flow

    • Ford: F’s free cash flow is quite healthy, at more than $9.1 billion over the last twelve months. That translates to a Free Cash Flow Yield of 23.5%, which is extremely attractive.
    • GM: GM has operated with negative Free Cash Flow since the last quarter of 2016, and as of the last quarter this number was a little more than -$12.3 billion dollars.
    • Fiat Chrysler: FCAU’s Free Cash Flow over the last twelve months is healthy at a little more than $4.9 billion. That translates to a Free Cash Flow Yield of 13.8%

    Winner: F, with the highest total dollar amount in Free Cash Flow over the twelve months along with the most attractive Free Cash Flow Yield.



    Debt to Equity

    • Ford: F has a debt/equity ratio of 2.8. High debt/equity ratios aren’t unusual for automotive stocks, however it should be noted that F’s debt/equity is the highest among the Big Three auto companies. The company’s balance sheet demonstrates their operating profits are sufficient to service their debt, with healthy liquidity to make up any potential difference if that changes.
    • GM: GM’s debt/equity ratio is 1.81, which is also pretty high, but below that for F. The difference, however is that while GM’s operating profits should be adequate to service their debt, they may not have enough liquidity to make up any potential operating shortfall.
    • Fiat Chrysler: FCAU’s debt/equity ratio is the lowest of the group, at .46. That alone puts them well ahead of the other two in this category; but it is also worth noting that the company’s cash and liquid assets are more than 34% higher than their long-term debt. That gives them the best actual financial base to operate from out of any of the Big Three.

    Winner: FCAU. Not even close.

    Dividend

    • Ford: F pays an annual dividend of $.60 per share, which translates to a very impressive yield of more than 6% per year.
    • GM: GM’s dividend is $1.52 per year, translating to an annual yield of 4.51%
    • Fiat Chrysler: FCAU does not pay a dividend.

    Winner: F. Dividends are the low-hanging fruit that every value-oriented investor should look out for.



    Value Analysis

    • Ford: F’s Price/Book value is $9.18 per share and translates to a Price/Book ratio of 1.07 at the stock’s current price. Their historical average Price/Book ratio is 2.12, which suggests the stock is trading right now at a discount of more than 97%. The stock is also trading about 60% below its historical Price/Cash Flow ratio.
    • GM: GM’s Price/Book value is $27.38 and translates to a Price/Book ratio of 1.23 at the stock’s current price. Their historical average Price/Book ratio is 1.9, which suggests the stock is trading right now at a discount of 54%. The stock is also trading more than 129% below its historical Price/Cash Flow ratio.
    • Fiat Chrysler: FCAU’s Price/Book value is $13.87 and translates to a Price/Book ratio of 1.29 at the stock’s current price. Their historical Price/Book ratio is 1.32, suggesting the stock is trading at a discount of 2.3%. The stock is also trading 55% above its historical average Price/Cash Flow ratio, suggesting the stock remains significantly overvalued, even at its current price.

    Winner: F, edging out GM for best overall value proposition, but not by a wide margin.

    The net winner? While FCAU has the best overall fundamental profile, it offers the least upside potential, with a significant level of downside risk. That puts F squarely in the winner’s circle for the best overall opportunity among the Big Three automakers under current market conditions. On the other hand, the greatest overall risk remains with GM, who despite the upside offered by its value measurements, has some big fundamental question marks that make the value proposition hard to justify.


  • 10 Sep
    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Since mid-July, I’ve written twice previously about Western Digital Corporation (WDC). The first time I wrote about them, the stock was priced around $75 per share, and my analysis showed that was a nice price for a good company that had hit an all-time high at around $107 just a few months before. On August 9, I wrote about them again, because the stock had dropped even lower, to around $66 per share, but now also had its most recent earnings report to add to the mix. At a price that was about 12% lower than just a few weeks before, and with a terrific fundamental profile, what had been a “nice’ price for the stock was now looking like a “great” price. Fast forward a month, and as of this writing the stock is now below $58 per share. The fundamentals haven’t changed in four weeks, but in the last week or so the stock picked up some more negative momentum and is pushing to even deeper lows.

    So what’s been driving the latest plunge, which has driven the stock down a little over 23% since my first post in July? Sometimes, the stock market makes sense – or at least, you can tie what a stock is doing at a given time to specific news, or to something about the underlying company that has some semblance of logic to it. Often, though, it’s downright maddening. I’ll admit that when I first saw WDC drop below $70 I struggled to tie it to anything concrete. I’ve kept digging, and while I think I’ve found a couple of threads to tie the decline to, the logic behind one of them makes me shake my head.



    Shortly after my July post, WDC published its latest quarterly earnings report. The numbers were good across the board – every fundamental measurement I use in my analysis remained very healthy or improved, including the company’s Book Value. It was right after that report, however that the stock started to drop. At the same time, WDC’s only real competitor in the HDD space, Seagate Technology Plc (STX) released their own earnings report. STX’s report reflected a reality that seems to be scaring investors about either company, because sales of HDD storage continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed.

    The picture for NAND and SSD storage – memory that is built on solid-state technology, and what has increasingly become the preferred storage type in the consumer market, including for personal computers of just about any type, tablets, and pretty much any type of mobile device – also appears murky, and that is another element that is working against the stock’s price right now. Multiple recent reports from industry analysts indicate that pricing for NAND memory is dropping amid concerns about oversupply as well as increasing competition in the space. That puts pressure on the second tier of WDC’s business strategy; the first tier continues to provide HDD storage to the enterprise and cloud storage market (where the larger capacities available from traditional drives is needed), while the second included the 2016 acquisition of SanDisk to put them at the front of pack in the consumer-driven NAND and SSD market.



    The truth, of course is that with more companies like Micron Technology (MU), Intel Corporation (INTC) and others making forays into the space, it isn’t a given WDC will maintain their leadership position in this segment. Intensifying competition, along with high supply clearly is also playing a role right now in the stock’s decline and is a major centerpiece of every argument I’m finding against paying attention to this space right now. That is actually one of the biggest reasons that i continue to think the opportunity with the stock is even better today than it was a month ago.

    Competition in any business segment is a normal thing, and while that increases the pressure on any company, a good management team doesn’t shy away from it. I really like WDC’s strategy, and I think that in the long run they’re doing the right things to keep their business growing. I’m even willing to concede that pricing pressures in the NAND and SSD space could impact the company’s earnings in the near term; but I think the market is over-selling that risk to the point that the stock’s incredibly deep discount now – more than 46% below its March high – is making the stock an undeniable bargain. Even the analysts that are writing scary predictions right now are putting the stock’s long-term target price at around $75, which is about 30% above the stock’s current price, and not too far from my own target, as you’ll see below.



    Fundamental and Value Profile

    Western Digital Corporation (WDC) is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company develops and manufactures a portion of the recording heads and magnetic media used in its hard drive products. WDC’s current market cap is $16.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 29% while revenue growth was modest, posting an increase of almost 6%. WDC operates with a narrow margin profile of about 1%. By comparison, STX’s margins are around 10%. I believe the difference is a reflection of the company’s differing approach to growth; STX focuses almost exclusively on the higher margin aspect of increasing enterprise demand, while WDC takes a two-tiered approach by meeting enterprise demand for HDD drives while also pushing hard on innovation and evolution with NAND and SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at almost $3.4 billion. That translates to a free cash flow yield of almost 17%, which is much higher than I would normally expect given the company’s narrow operating margins.
    • Debt to Equity: WDC has a debt/equity ratio of .95. That number declined from a little above 1 two quarters ago, as long-term debt dropped by more than $1 billion. Their balance sheet indicates their operating profits are more than adequate to repay their debt, and with almost $5 billion in cash and liquid reserves, the company has excellent financial flexibility, which they plan to use to pay down debt, repurchase their shares and consider other strategic acquisitions.
    • Dividend: WDC pays an annual dividend of $2.00 per share, which translates to a yield of almost 3.5% at the stock’s current price. That fat dividend – quite a bit higher than the S&P 500 average, which is a little below 2% – is a good reason to think seriously about buying the stock and waiting out any near-term price volatility you might have to endure. It’s free money you don’t have to do anything for except to hold your shares.
    • 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 WDC is $38.53 and translates to a Price/Book ratio of 1.45 at the stock’s current price. Their historical average Price/Book ratio is 2.12. That suggest the stock is trading right now at a discount of a little over 31%, which is very attractive, since it puts the stock’s long-term target price at nearly $84 per share.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The red diagonal line 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 broke below strong support from repeated low pivots since late last year at $75, which has really driven the stock’s bearish momentum. The Fibonacci analysis shown on the chart above makes it hard to see where the stock’s next support level is likely to be. The stock is currently plumbing lows not seen since late 2016, where previous pivots put the most likely support in the $53 range.
    • Near-term Keys: As you can see, the stock is already offering a massively discounted price relative to where I think it’s long-term potential lies. The truth is that if you went long on this stock in late July, you’re probably trying to decide what to do to manage the position now. I think there is more than adequate argument to hold on and ride out the stock’s current downward trend; but if you want to limit your risk, using a stop loss 25% below your purchase price would be a smart, conservative approach. If you’re thinking about trying to short the stock or start working with put options to take advantage of downside, the best signal for that kind of trade would come if the stock manages to break prior pivot support at around $53. That could see the stock drive even lower and into the mid-$40 range.


  • 24 Aug
    FAANG bubble? Basic valuation analysis says YES!

    FAANG bubble? Basic valuation analysis says YES!

    This New Tesla Coil is the Future of Electricity

    In 1891, Nikola Tesla stunned the scientific community by inventing a device that could transmit electricity through the air. This breakthrough device could power light bulbs and electric motors wirelessly, at a distance of a few feet.

    Read More

    It’s not quite 20 years since the “dot-com boom” became the “dot-com bust,” but as the market extends itself into the longest bull market in history, it’s hard not to see some of the same characteristics between the stock market in the years leading up to that crash and this one. More →

  • 25 Jul
    TTC is down 18% for the year, and consolidating. Is it a great buy?

    TTC is down 18% for the year, and consolidating. Is it a great buy?

    President Trump Made A “Promise” To Americans 30 YEARS ago???

    UNBELIEVABLE: Before he was President Trump, “The Donald” went on Oprah and made THIS shocking “promise” to Americans… And KEPT it. 30 years later, hardworking Americans have been able to cash “Trump Bonus Checks” for $4,280… $6,344… and even an exceptional $8,181 per month!

    Read More

    One of the biggest challenges all investors face is finding stocks to invest in. It isn’t just about picking a stock out of the thousands that are available, but also trying to figure out when the time is right to make the investment. Momentum and trend traders like to try to time the swings from high to low extremes within price trends to place short-term trades, while investors with a longer time period in mind usually look at the fundamental strength of the underlying business. Value-oriented investing, which is the approach I prefer and write about, incorporates aspects aspects of both trend and fundamental analysis to determine if a stock’s current price is lower than it should be. It doesn’t mean the stock is guaranteed to go up, of course, but it does provide a pretty good way to build a case for whether a stock is worth the bother right now, later, or even at all.

    The Toro Company (TTC) is an interesting case study. This is a mid-cap Machinery company with an easily recognizable brand; if you mow your lawn, enjoy gardening or landscaping, or have to deal with snow in the winter, there’s a good chance you are familiar with their products. TTC competes with other companies in the Machinery space like Deere & Co. (DE) and Briggs & Stratton (BGG), to name just a couple. Their business has a definite element of seasonality associated with it; in their most recent quarterly earnings report, for example, the company cited a more-temperate-than-expected winter, in many parts of the country along with a delayed start to spring as factors that impacted revenues and earnings in the quarter. Even so, the company also has a diverse product portfolio that makes them an interesting player. The stock’s price is also down for the last twelve months, having hit a high price at around $73 in August of last year before dropping quickly to a range somewhere between $56 on the low side and around $62 on the high end. The stock is roughly the middle of that range right now and has been holding this sideways pattern for the past few months. 

    The stock’s current, and somewhat extended, sideways pattern marks a consolidation of price that usually gets technical traders to start paying a little more attention, since stocks inevitably find a reason to break out of consolidation ranges to establish new trends. When the stock is trading significantly below its historical levels, technical traders usually look at a consolidation pattern as a bullish indication and will start looking for a strong upside breakout signal to place a trade. As a value investor, consolidation makes me check a stock’s fundamentals to determine if there is a strong argument that the stock should move higher over either an intermediate or long-term perspective, and if the value proposition isn’t compelling enough right now, what is the price at which I think the stock is a good buy.



    Fundamental and Value Profile

    The Toro Company (Toro) is engaged in the designing, manufacturing, and marketing of professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. The Company operates through three segments: Professional, Residential and Distribution. Under the Professional segment, Toro designs professional turf, landscape and lighting, rental and specialty construction, snow and ice management, and agricultural products. The Residential segment provides products, such as riding products, home solutions products and snow thrower products. It manufactures and markets various walk power mower models. The Distribution segment consists of Company-owned domestic distributorship. Its brands include Toro, Exmark, BOSS, Irritrol, Hayter, Pope, Unique Lighting Systems and Lawn-Boy. TTC’s current market cap is $6.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 11% while revenue growth was mostly flat, posting an increase of .29%. TTC operates with a narrow margin profile of about 1%. The results are more encouraging over the last quarter, where earnings grew 150% and revenues improved almost 60%. In addition, the company’s Net Income was about 10% over the past year, but improved to almost 15% in the last quarter.
    • Free Cash Flow: TTC’s free cash flow is healthy, at a little more than $257 million. This is a number that has declined over the past year from a little above $340 million.
    • Debt to Equity: TTC has a debt/equity ratio of .48. Their balance sheet shows about $206 million in cash and liquid assets versus about $300 million in long-term debt, which a pretty good indication that the company works with a conservative debt management philosophy. Given their healthy operating margins, they should have no problem servicing their debt.
    • Dividend: TTC pays an annual dividend of $.80 per share, which translates to a yield of about 1.33% 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 TTC is $5.81 and translates to a Price/Book ratio of 10.29 at the stock’s current price. Their historical average Price/Book ratio is 9.96, which provides a pretty strong argument for the fact that while the stock isn’t overvalued, it also isn’t a great value right now. I’m also not confident that under current conditions, with some early signs that steel and aluminum tariffs are starting to squeeze margins for industrial stocks, that the market is likely to start rotating into these stocks in the near future. A more compelling value argument in my mind would be made with the stock in the $45 to $46 range – which is a level the stock hasn’t seen since late 2016.



    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 long-term downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. As I observed earlier, the stock is currently hovering in a range between about $56 (range support) and $62 (range resistance). That range has been pretty persistent since April of this year. In order to reverse its long-term downward trend, the stock would need to break out of that range and move above the $63 area marked by the 38.2% retracement line. A break below $56 would reconfirm the long-term trend’s strength and could see the stock drop down into the $46 to $49 range.
    • Near-term Keys: If you’re looking for a way to take advantage of the bullish side of the market with TTC, look for a strong move above $63 before buying the stock or working with call options. If the stock does break below $56, that could be a good signal to short the stock or to consider buying put options. If you’re a value-oriented investor like me, a break below $56 could be a good reason to start paying closer attention, with stabilization below $50 an area where the stock’s value proposition could become very attractive.


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