Value Investing

  • 27 Jul
    International Paper offers a BIG value right now

    International Paper offers a BIG value right now

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    No matter what current market conditions are, one of the biggest challenges for an investor is finding stocks that fit their investment preferences at any given time. The market ebbs and flows from high to low extremes, and those shifting conditions mean that investing strategies designed to work in one type of environment will offer up fewer choices and opportunities in another. Value investing is a great example; when the market has been declining for an extended period of time, or even in the early stages of recovery, finding undervalued stocks isn’t that hard to do. The longer a bull market lasts, however, the harder that becomes, as more and more stocks are found at or near historical highs, and at inflated prices relative to the stock’s underlying fundamentals.

    As a value-oriented investor, I’ve learned that just because there may be fewer bargains available in the late stages of a bull market (and let’s face it, we absolutely are in the very late stages of this latest bull market), it doesn’t mean that I have to change my philosophy. It does mean that I become a more cautious and deliberate buyer, and my core fundamental and value criteria become even more important, because they help me maintain my discipline and avoid jumping on the market’s bullish bandwagon at the dangerous, “irrational exuberance” stage. I’m not sure we are at that point yet, but we also aren’t very far off from it, and so my conservative approach continues to help me sleep well at night.



    International Paper (IP) is a stock that has seen an impressive increase in price since the current bull market started in early 2009 was only around $4 per share, and as of now it is trading a little above $52 per share. At first blush, that might make the stock sound more like it should be overvalued. The company has a strong fundamental profile, however, and the growth of its business over the same period lends to strong argument for the stock’s higher price. Not only that, over the course of the calendar year the stock is actually down more than 20% from its all-time high. I think there is a very strong argument to be made that at its current levels, IP looks like a pretty attractive value play right now.

    The question of trade is something that practically every business with an international profile has to grapple with, as questions about tariffs continue to linger. IP released its latest quarterly report yesterday, and the CEO indicated that to this point, the company hasn’t seen any direct impacts from tariffs. Instead, IP is a company whose risk exposure to trade tensions is mostly secondary. The simplest example, which the CEO cited, was packaged food. If IP’s customers are hit with higher costs from tariffs and uncertainty from an extended trade war, they will need less packaging products, which would then impact IP’s operations. An example that counters this logic applies to China, who the CEO pointed out doesn’t make its own fiber-based products like pulp and paper, which means they have to purchase ti elsewhere. Tariffs won’t be likely to change that reality, which means that area of business should continue to perform well.



    Fundamental and Value Profile

    International Paper Company is a paper and packaging company with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia, Africa and the Middle East. The Company’s segments include Industrial Packaging, Global Cellulose Fibers, Printing Papers and Consumer Packaging. The Company is a manufacturer of containerboard in the United States. Its products include linerboard, medium, whitetop, recycled linerboard, recycled medium and saturating kraft. The Company’s cellulose fibers product portfolio includes fluff, market and specialty pulps. The Company is a producer of printing and writing papers. The products in Printing Papers segment include uncoated papers. The Company is a producer of solid bleached sulfate board. As of December 31, 2016, the Company operated 29 pulp, paper and packaging mills, 170 converting and packaging plants, 16 recycling plants and three bag facilities in the United States. IP’s current market cap is $21.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 57% while revenue growth was modest, increasing only 2%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; but it is also a positive mark of management’s ability to maximize business operations. The company’s Net Income for the last twelve month was almost 13% of Revenues, with this number decreasing to about 7% in the most recent quarter. 
    • Free Cash Flow: IP’s free cash flow is healthy, at $361 million. This is a significant increase from the last quarter, when free cash flow was a more modest $175 million.
    • Debt to Equity: IP has a debt/equity ratio of 1.48, implying they are fairly highly leveraged. This is pretty normal for the Containers & Packaging industry. The company’s balance sheet indicates their operating profit are more than adequate to service their debt, with cash and liquid assets of more than $1.1 billion to provide additional flexibility.
    • Dividend: IP pays an annual dividend of $1.90 per share, which translates to a yield of about 3.64% 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 IP is $16.58 and translates to a Price/Book ratio of 3.17 at the stock’s current price. Their historical average Price/Book ratio is 4, which provides a strong basis for the stock’s long-term upside. A move to par with the average would put the stock above $66 per share, more than 27% higher than the stock’s current price and very near to its 52-week (and all-time) high around $67.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from October of 2016 to late January of this year, and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock has significantly retraced that upward trend, and has used the $51 level as strong support since late March. More recently, the stock’s trading range has narrowed, with resistance around $53 and support in the same $51 price area. Its current range also sits inline with the 61.8% retracement line, reinforcing the strength of the support the stock has seen over the last few months.
    • Near-term Keys: If you don’t mind working with a little volatility over time, and can tolerate a potential swing lower, the value proposition for the stock offers a great long-term opportunity with a very attractive dividend yield to draw from right now. If you prefer to work with shorter trading periods and strategies like swing or momentum trading, look for a push above $53 before taking a long position in the stock or working with call options. A drop below the stock’s current support around $51 could mark an interesting signal to short the stock or work with put options, since the stock isn’t likely in that case to find new, significant support before reaching the $46 level shown by the 88.6% retracement line.


  • 26 Jul
    KSU is breaking out – how far can it go?

    KSU is breaking out – how far can it go?

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    Throughout the year, transportation stocks have mostly lagged the rest of the market. There are multiple reasons that just about anybody could point to – increasing fuel costs, broad-based market uncertainty and volatility related to questions about the economy’s health and rising interest rates, and certainly questions about ongoing trade tensions – but the truth is that investing in this segment this year has translated to some tough sledding. Interestingly enough, however it looks like this is a sector that is starting to move into favor. The Dow Transportation Average is up almost 2% since last Friday, and almost 5% after rebounding off of support from its 200-day moving average line earlier last week. That momentum has given a nice push to a lot of well-known, large transportation names like Union Pacific (UNP) and CSX (CSX). If this momentum holds, those stocks could keep pushing to new all-time highs, but my bet is on the smallest Class 1 railroad in the United States. I think Kansas City Southern (KSU) is a stock you should be paying attention to.

    Trade tensions between the U.S. and its allies are a concern, and the truth is that KSU is exposed to a significant amount of trade war risk, since the railroad focuses on the north/south freight corridor that connects the central  and southern areas of the United States with northern Mexico. NAFTA-related concerns have mostly taken a back seat in the national narrative about trade, as tariffs against China and the European Union have dominated headlines; but the fact is that the same kinds of questions exist for the U.S. with Canada and with Mexico. In KSU’s most recent quarterly report, however, management reported a 19% increase year-over-year in cross-border volumes. 

    Management seems to believe that trend will continue, as their CEO stated on the earnings call that he expects volume growth to continue through 2019. Yesterday President Trump announced an agreement with the European Union to halt further tariffs on each other, and to work on reducing existing tariffs – including those on steel and aluminum – and increase trade on U.S. goods like soybeans and liquified natural gas. That news didn’t include Mexico, or relate directly to questions about NAFTA, of course, but the idea that the U.S. is going back to the negotiating table with the E.U., rather than continuing to escalate trade tensions, seems to be giving the market at large some hope it will do the same for its other trading partners. That is a dynamic that I think will continue to provide some uncertainty and volatility to stocks like KSU for the time being, but more positive trade developments could also add an extra boost of bullish enthusiasm to the stock’s price activity.



    Fundamental and Value Profile

    Kansas City Southern (KCS) is a holding company. The Company has domestic and international rail operations in North America that are focused on the north/south freight corridor connecting commercial and industrial markets in the central United States with industrial cities in Mexico. The Company’s subsidiaries include The Kansas City Southern Railway Company (KCSR) and Kansas City Southern de Mexico, S.A. de C.V. (KCSM). KCSR serves a 10-state region in the midwest and southeast regions of the United States and has the north/south rail route between Kansas City, Missouri and various ports along the Gulf of Mexico in Alabama, Louisiana, Mississippi and Texas. KCSM operates a corridor of the Mexican railroad system. KCSM’s rail lines provide rail access to the United States and Mexico border crossing at Nuevo Laredo, Tamaulipas. KCSM also provides rail access to the Port of Lazaro Cardenas on the Pacific Ocean. KSU’s current market cap is $11.9 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew almost 16% while revenue growth great about 4%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; but it is also a positive mark of management’s ability to maximize business operations. The company also operates with healthy operating margins, since Net Income for the past year was 36% of revenues and almost 22% for the last quarter. 
    • Free Cash Flow: KSU’s free cash flow is healthy, at almost $455 million. This is a number that has increased steadily since late 2015, when it was below 0.
    • Debt to Equity: KSU has a debt/equity ratio of .54. Their balance sheet indicates their operating profits are more than sufficient to service their debt.
    • Dividend: KSU pays an annual dividend of $1.44 per share, which translates to a yield of about 1.24% 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 KSU is $48.85 and translates to a Price/Book ratio of 2.37 at the stock’s current price. Their historical average Price/Book ratio is 2.98, which to provides a strong basis for continued long-term upside for this stock, since a break above its 52-week high makes it difficult to forecast new resistance levels. A move to par with its historical average would put the stock above $144 per share. That would mark a new all-time high, but given the company’s overall strength and the momentum the sector appears to be drawing right now, it also looks like a reachable long-term target price.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: It’s pretty easy to see what the broader momentum and interest in the transportation sector has done for KSU over the last several days; the stock bounced off of range support last week, and used that bullish momentum to break above range resistance around $113 this morning. Swing and momentum traders like to see this kind of break, since it can act as a very good signal for a short-term trade.
    • Near-term Keys: If your prefer is to work with a short-term trade, this could be a very good signal to buy the stock or to work with call options. The stock’s all-time high was reached in late 2013 at around $124 per share, and so that price level could provide a good target point to exit a swing or momentum trade. If you’re willing to take a longer-term view, however, buying the stock gives you the opportunity to draw its dividend and hopefully take advantage of a value-based opportunity that offers nearly 25% upside potential. Risks to either kind of a trade – short or long-term – are related primarily to lingering trade questions. It isn’t a given that yesterday’s positive news with the E.U. will carry over to Mexico or NAFTA concerns, and that means that you have to be willing to accept some price volatility if you decide to take a position in this stock. Also, if the stock starts to lose bullish momentum and drop back down, watch the $104 price level. A drop below that price would mark an important break below range support and could force the stock into an extended downward trend.


  • 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?

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    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.


  • 24 Jul
    Trade war fears are driving WHR down to REALLY interesting value levels

    Trade war fears are driving WHR down to REALLY interesting value levels

    Since the beginning of the month, the stock market has shown some positive momentum, with the S&P 500 driving from around 2,700 to a little above 2,800 as of this writing. That boost seems to come in spite of trade tensions, which always seem to be lurking close by and ready to start grabbing headlines and investor’s attention all over again. Today another wrinkle seems to be making its way into the storyline, as the Trump administration appears ready to make about $30 billion in emergency aid available to U.S. farmers that have been negatively impacted by tariffs. That certainly seems like a tacit acknowledgement that a trade war is really hurting Americans, and that more pain could be coming in the near future since the administration doesn’t seem to be changing its tone or approach in any meaningful way.

    The truth is that any actual impact of tariffs – from the U.S. on another nation, or vice versa – isn’t likely to be seen on an immediate basis. The markets, however are emotional by nature, which means that they usually react as much, if not more, to the perception of news more than to its reality. That’s why the entire semiconductor sector, with massive exposure to China has seen its practically uninterrupted momentum of nearly nine years fade over the last few months and even turn bearish since early June. The same is true of industrial stocks, where steel and aluminum tariffs have muted enthusiasm for stocks in that sector despite recent, generally positive earnings growth.



    It is also true that increased globalization, facilitated by technological advancement in practically every economic sector means that most companies that have been successful at growing revenues and profits over the last two decades or more have done so by extending their reach far beyond their own national borders. That means that almost no matter what business you look at, how well-established it may be, or what its perception as a “national icon” may be, if you dive deeper into its business you’ll find that tariffs between any, or all of the nations embroiled in trade tensions is exposed to a heightened risk of increased costs from tariffs. As investors, that means it can be hard to figure out how to invest actively, but conservatively by limiting your own exposure. 

    The concern over tariffs is an important element to consider when you’re thinking about Whirlpool Corp. (WHR), which is a stock that anybody should be able to recognize easily; there is, after all an excellent chance that you have one or more Whirlpool or Maytag appliances in your own home. The company reported earnings this morning that missed most analyst’s expectations; management also lowered their profit outlook for the rest of the year and cited increased costs of steel and resin as well as freight. One of the factors that the company cited for those increased costs included tariffs imposed by the Trump administration on steel imports (although the implication from the conference call was that they were just one contributor, and not the biggest one). The news sent the stock plunging more than 14% below yesterday’s closing price. 

    The company also faces intense competition from South Korean companies like Samsung and LG, but still remains one of the largest home appliance (large or small) manufacturers and markets in the world. How does WHR shield you from trade risk, especially when they are citing tariffs as an element that is increasing their costs? While the company operates globally, it also localizes its manufacturing operations, which means that products sold in the U.S. are manufactured in the U.S., products sold in Europe are manufactured in Europe, and so on. Despite its global footprint, North America remains its largest market, with more than 54% of all sales in 2017 coming locally. By comparison, 23% came from Europe, the Middle East, and Africa, 16% came from Latin America, and only about 7% from Asia. WHR’s CEO also indicated that because the company negotiates annual contracts for the steel they buy, they hadn’t been strongly affected in the last quarter by steel tariffs; however it does raise some concern that the longer the tariffs persist, the more direct the impact will be, which appears to be a reason for the lowered profit forecast. Even so, the company remains profitable, with strong, positive cash flow, continued market leadership and a dividend yield far above the S&P 500 average, but that remains conservative from a payout ratio perspective. The bonus for a value-oriented investor is that the stock’s overnight drop really puts its price at a deeply discounted level that is attractive for those willing to work with a long-term perspective.



    Whirlpool Corp. (WHR)

    Current Price: $129.96

      • Earnings and Sales Growth: Earnings decreased from $3.35 a year ago to $3.20 in the most recent quarter. The market was expecting to see a year-over-year increase to $3.69 per share. Revenues also missed the mark, dropping to $5.14 billion versus $5.35 billion a year ago. While the market is reacting negatively to the fact that the numbers missed analysts expectations, I think it’s constructive to put the year-over-year decline in perspective; the earnings drop is about 4.4%, while revenues dropped by about 3.9%. That isn’t insignificant, especially if you think about it on an annualized basis and consider that the global economy has generally been healthy. Don’t make the mistake, however of attributing the drop just to trade war concerns. Other factors that had an impact, for example was a trucker strike in Brazil that impacted WHR’s business in Latin America and could continue to show softness until its general elections in October are settled, as well as sales declines in the EMEA portion of their business.
      • Free Cash Flow: WHR’s Free Cash Flow is healthy, and their balance sheet indicates they have good liquidity, with more than $1 billion in cash and liquid assets to supplement healthy operating margins.



    • Debt to Equity: WHR has a debt/equity ratio of .80 as of the quarter prior. Long-term debt has increased since the end of 2017 by about 10%, and so I expect this number is going to go up somewhat. Their balance sheet however implies that operating margins remain healthy and more than adequate to service their debt, with good cash and liquid assets to provide additional flexibility.
    • Dividend: WHR pays an annual dividend of $4.60 per share, which at its current price translates to a dividend yield of about 3.54%, well above the S&P 500 average of 2%. Its dividend offers an attractive yield for patient investors who would be willing to hold the stock and wait for its trend to shift back to the upside.
    • Recent Price Action: The stock has been trending lower for the past year, hitting a high in July of last year at about $200 before tapering lower from that point. Its current price marks a 23% decline from its 52-week high, and therein lies the opportunity. The stock hit a trend low point in late June at around $142 before rebounding a bit. The stock plunged overnight due to the pre-market earnings call to its current level as the market is reacting in an extreme way to the earnings miss and the lowered forecast. The acknowledgement that tariffs are playing a role seems to simply be adding fuel to that fire for now, but from a value standpoint it’s really just creating an even better value proposition. Given the company’s strong fundamental profile, its current price could be considered a good value. It is now trading only about 1.7 times above its latest Book Value, while its historical average is about 2.6. That puts a long-term price at around $191 – near to its 52-week highs. Adding to its value argument is the fact that at its current price, it is trading at less than ten times forward-looking earnings, while the average for stocks in the S&P 500 Index right now is 17.1.


  • 23 Jul
    HAS beats Street estimates, but its 12% overnight jump is a Red Herring

    HAS beats Street estimates, but its 12% overnight jump is a Red Herring

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    Before the market opened this morning, toymaker Hasbro, Inc. (HAS) released its report of second quarter results, and the numbers prompted the market to push the stock up in a big way early in the trading session. After closing a little below $94 on Friday, the stock opened Monday’s trading session at nearly $105 per share and pushed as high as $107 in the early hours of the day. The report must have been really great, right? Well, not so fast.

    One of the interesting things about the stock market is watching the way it reacts to company reports. All things being equal, when a company can demonstrate that their business is growing, their stock should go up, and when it is shown that business is contracting, the stock should also go down. Of course, all things are not equal, and that means that the market, being an emotional animal, treats stocks differently. Sometimes the market’s immediate reaction is about something entirely different than whether a company’s business is growing or shrinking. Hasbro’s price action today is a pretty good example.

    Analysts and investors alike like to try to predict what a company’s report is going to look like. They analyze and measure all kinds of information and data and try to make their own educated guesses about what is going to happen. With HAS, one of the factors that everybody has been trying to account for is the effect that the collapse of U.S. toy store Toys ‘R’ Us, which of course was one of the toymaker’s biggest customers would have. Analysts had anticipated a drop in revenue of a little more than 14% versus the same quarter in 2017, and earnings to decline by more than 45%. Revenues actually declined by 7%, less than half of what was expected, and earnings only dropped by about 9.5%. Seeing both of those numbers come in better than expected led the market to respond with high enthusiasm. Clearly, the market seems to be treating the news as an indication that the effect of the liquidation of Toys ‘R’ Us was much less than expected.



    I’m not saying that the news in this case isn’t positive; being able to minimize the impact from a negative event like a major customer’s complete and utter collapse is a mark of strong management. But does it justify sending a stock 12% above its current price in a single day? That’s where my red herring reference comes into play. The market has always seemed to prefer to draw any kind of silver lining it can from news to drive a stock’s price higher, but the problem is that immediate boost often puts average investors at a disadvantage and increases their risk. The people that stand to benefit most clearly from that early surge, of course, are the investors that were already holding shares of the stock; but the probability any chance the stock will keep going up is less likely to be about emotion and more about the stock’s fundamentals.

    One of the short-term risks about jumping into a stock that is making a big overnight jump based on a news headline comes from the size of that overnight jump. If you’re an investor or trader that had the good fortune to buy HAS at any point in the last month or so when the stock was languishing in the $85 to $94 range, seeing the stock jump up more than $10 per share overnight would certainly be exciting; it would also automatically make you think about selling your shares back to the market to lock in that gain. That is exactly what I think a lot of folks are going to be doing in the next day or so; and while it isn’t a given that is going to drive the stock lower, the odds that it will drop are much greater than that it will keep going up. I’ll quantify exactly how much downside risk I think there is in that scenario later in this post. For now, let’s dive in into whether or not the stock should worth the $100-plus share price it carries at the moment.



    Fundamental and Value Profile

    Hasbro, Inc. (HAS) is a play and entertainment company. The Company’s operating segments include the U.S. and Canada, International, and Entertainment and Licensing. From toys and games to content development, including television programming, motion pictures, digital gaming and a consumer products licensing program, Hasbro fulfills the fundamental need for play and connection for children and families around the world. The Company’s U.S. and Canada segment is engaged in the marketing and sale of its products in the United States and Canada. The International segment is engaged in the marketing and sale of the Company’s product categories to retailers and wholesalers in most countries in Europe, Latin and South America, and the Asia Pacific region and through distributors in those countries where it has no direct presence. The Entertainment and Licensing segment includes the Company’s consumer products licensing, digital gaming, television and movie entertainment operations. HAS’ current market cap is $13.3 billion.

    • Earnings and Sales Growth: Over the trailing twelve-month period, earnings declined almost 77% while revenue dropped about 16%. Over the same period, HAS has operated with a very narrow margin profile of less than 5% that was actually negative over the last quarter.
    • Free Cash Flow: HAS’s free cash flow prior to the last quarter was healthy, at about $497 million. The company has about $1.1 billion in cash and liquid assets, a number that declined from almost $1.6 billion in the quarter prior.
    • Debt to Equity: HAS has a debt/equity ratio of .98 as of the quarter prior to today. Total long-term debt in the most recent was about the same, at about $1.64 billion.
    • Dividend: HAS pays an annual dividend of $2.52 per share, which translates to a yield of about 2.36% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HAS is $12.58 and translates to a Price/Book ratio of 8.47 at the stock’s current price. That is quite high, well above the industry average of 3.2 and its own historical average of 5.22. A move to par with its historical average would put the stock at about $66 per share – more than 38% below the stock’s current price. I believe this is a pretty fair evaluation of what the stock’s long-term, fair market value should be. For a value-based investor, the stock would have to drop to at least this level before it would merit serious consideration.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: The dotted green line highlights the stock’s upward trend, dating back to early April. The stock has shown good bullish strength from this period, increasing about $10 per share before this morning’s big break higher. I’m using the dotted blue line for a couple of things. First, before today this was the stock’s most likely strong resistance level, and today’s clear break, with a huge gap between Friday’s close and this morning’s opening price above it is a clear technical indication of the stock’s current bullish momentum. The line is also useful when thinking about investor behavior as it relates to overnight gaps. Since gaps like this translates to large, unexpected but happy gains for people who bought in before the jump happened, it isn’t unusual to see an increasing in selling immediately after the gap, as profits are taken and locked in. An abundance of technical study suggests that gaps tend to fill themselves, which means that a bullish gap like the one we’re looking at now is very likely see the stock drop back down in the near term. One technical theory that I think has good anecdotal evidence behind it suggests the stock should fill approximately half of the distance covered by the initial gap. The blue line, sitting right around $99 per share, is right in that price area, and is further bolstered by repeated pivot highs in that same range, in February of this year and multiple points in 2017. That puts the stock’s minimum immediate downside risk in the $6 to $7 per share range now – far above what any near-term upside forecast is likely to be.
    • Near-term Keys: If the stock stabilizes in the $99 to $100 range, that could be a good indication the stock will push back to test the high it set today around $106 per share, which could offer a good signal for a short-term swing trade using call options or buying the stock outright. A break below the $99 support level should put you on notice to watch to see if the stock will find support along its intermediate trend line around $93. A break below that level would mark a reversal of that upward trend, and could easily see the stock drop all the way to the $83 level to test its 52-week low. A break below $93 could offer a nice signal to start working the bearish side of the market by shorting the stock or using put options.


  • 20 Jul
    WDC is down more than 27% from its 52-week high: time to buy?

    WDC is down more than 27% from its 52-week high: time to buy?

    Throughout the year, the Technology sector has led the market in terms of performance; as measured by the S&P Technology Select Sector ETF (XLK), the sector is up almost 12.5% year-to-date, with many analysts predicting even more growth ahead. One of the trends they like to point to is the growth of cloud-based services; after the market close yesterday, for example, Microsoft (MSFT) reported that revenue for its Azure cloud service jumped 89 percent to nearly $7 billion. As an investor, targeting cloud services specifically can be a little tough, since the market leaders are diversified businesses like Amazon (AMZN), MSFT, and Alphabet’s Google (GOOGL). Perhaps another way to look at it is to focus on companies that build some of the components used in cloud servers. Western Digital Corp (WDC) is a good example.

    WDC has bucked the sector’s trend for the year, since it is down almost 5.5% for the year. More interestingly, the stock is nearly 28% below the high it found in mid-March at around $107 per share. WDC’s underperformance year-to-date, along with the fact that the stock is hovering near to its 52-week low point right now, raise some intriguing possibilities for a value-oriented investor. The hard disk drive market has seen declining trends over the last few years, since it has historically been closely tied to PC shipments. That doesn’t mean companies like WDC or its nearest competitor, Seagate Technology Plc (STX) are operating in a dying market space; it does mean that growth for stocks in this space has been closely tied to consolidation and diversification, since emerging storage technology such as solid state drives (SSD) makes standard hard disk drive (HDD) storage less and less compelling.



    In late 2016, for example, WDC completed a $67 billion-plus acquisition of SanDisk, the maker of the NAND flash memory used in SSD’s. That positions the company to navigate what most think is an inevitable, and permanent transition away from HDD storage. In the meantime, another trend that also plays into WDC’s favor is the growth in storage demand from enterprise customers like cloud service providers. That growth is expected to largely offset declining consumer demand while the SSD market is expected to mark the best path to continued growth. WDC is positioned better than STX in this respect, since STX has so far been content to rely on the increase in enterprise demand for HDD storage capacity to this point. Don’t ignore the fact, however that other players, like Intel (INTC) and Samsung Electronics are pushing hard into the SSD space, which means that competition and pricing pressures are likely to remain pretty high.

    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 $23 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 62% while revenue growth was modest, posting an increase of almost 8%. 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 is meeting enterprise demand while also pushing hard on innovation and evolution with SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at more than $3.5 billion. That translates to a free cash flow yield of more than 15%, 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 .98. That number declined from a little above 1 over the last quarter, 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 about 2.6% 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 WDC is $37.97 and translates to a Price/Book ratio of 2.02 at the stock’s current price. Their historical average Price/Book ratio is 2.12, which is less than 5% above its current level. That implies limited upside based on the way the market has historically priced the stock; however the industry average is 4.6, suggesting the stock could be significantly undervalued right now. Using a long-term target price above $140 is probably over-optimistic since the stock’s highest price was reached in late 2014 around $110; however if the company’s evolution strategy is correct, as I expect it to be, makes that historical high useful.



    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 is sitting very near to strong support from repeated low pivots since late last year. That support marks an important inflection point for the stock right now; if the stock breaks below it by dropping below $75, it could drop to as low as around $64 before finding a new, strong support level. On the other hand, a new pivot higher off of the $75 level, with strong buying volume could see the stock push near to the resistance line offered by the 38.2% retracement line around $88 in fairly short order. The stock would have to break above that resistance level to confirm a new upward trend and validate a longer-term push into the $107 to $110 level.
    • Near-term Keys: If the stocks breaks below its current support at around $75, a smart short-term trade could be to short the stock or work with put options to take advantage of the stock’s current downward trend. If the reverse is true, and the stock uses that support to bounce higher, a short-term trader should look for a push to $80 as a signal to buy the stock or start working with call options. If you’re willing to tolerate some volatility in either direction right now, and you like the long-term prospects for WDC more than any current downside, this could be a good time to take a new long-term position. A strict value-oriented investor would probably prefer to wait to see the stock test support around the $64 level, where the stock’s Price/Book ratio would also be low enough to offer a significant discount.


  • 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.


  • 28 Jun
    DISH: Dead cat bouncing, or incredible bargain?

    DISH: Dead cat bouncing, or incredible bargain?

    Consumer trends can be a fascinating thing to watch, despite the fact that sometimes they are fickle. That’s because sometimes those trends can give you important clues about the viability of certain products or ways of approaching business. It’s easy to get caught up in the excitement of a new, groundbreaking technology, for example, but if the buying public doesn’t buy it, it doesn’t matter how great the tech is; it isn’t going to stick around for very long.

    In the 1980’s, my parents bought a video tape player for the family. We were excited because we could finally watch movies in our home without having to wait for network TV to broadcast them for us. The player was a Betamax player, and my dad went to great lengths about why Betamax players were superior to the VHS players we had been hassling him about. And it’s true, it was a terrific piece of machinery, and I thought that the quality of our home recordings, and of movie tapes in general, was far better than any comparable VHS tape.

    The thing was, not many other people felt the same way – or cared enough to make Betamax more than a passing fad. By the beginning of the 1990’s, Betamax was a thing of the past. We still had our player, and the tapes with our home recordings, but guess what we had sitting right on top of it? You bet – a VHS player, and all of the movies we bought to keep at home were VHS tapes. If you invested back then in Betamax development, you probably lost a lot of money.



    The same idea can be applied to very mature businesses as well; the advent of one kind of new technology often means that a previously lucrative and growing technology becomes obsolete. That is especially true if the new technology is widely adapted and erodes the consumer base the older technology relied on. Cable and satellite broadcasting is one of those mature technologies that consumer trends show may be looking at the end of its usefulness in the not-so-distant future. More and more customers of all ages are “cutting the cord” with traditional television viewing in favor of on-demand, web-based streaming services. It’s a trend that has built Netflix (NFLX) into a media powerhouse with a market capitalization larger than the Walt Disney Company (DIS) and has traditional broadcasting networks scrambling to find ways to evolve and survive.

    Dish Network Corporation (DISH) is among a number companies in the Media industry that finds itself at a crossroads, with a still large, but dwindling subscriber base that requires attention and a high level of service and quality, but a desire to redirect its business to evolve with the needs of a changing business landscape. The market has seen the numbers about their eroding customer base and has treated the stock accordingly, driving it into a clear downward trend for the past year that has seen it lose approximately 50% of its value over that period. A clear loser in the scope of broader market performance, the stock has actually rebounded almost 16% since the beginning of June. Contrarian, value-oriented investors might be tempted to bet on a reversal of the stock’s long-term downward trend, but others would be more cautious.

    “Dead cat bounce” is a term that investors like to use to describe what happens sometimes when a stock in a long, downward trend finds support and starts to rally higher. Generally speaking, the only way a long-term downward trend can manage a legitimate reversal is if the market sees a very strong fundamental reason to start buying the stock. Often, a stock experiences that downward trend for very good reasons, and in the case of DISH, an eroding customer base is one of those very good reasons. The problem the company has in reversing the trend is that the erosion isn’t to competitors in the same business; it’s coming from a “sea change” in consumer habits and preferences that typically marks the death of one business model in favor of another. The “bounce” comes when technical traders start to buy the stock at a low point, hoping for a quick, short-term gain in the stock’s price; but since there is no fundamental reason for other investors with a longer-term perspective in mind to jump in, that gain is extremely limited in both size and duration.



    The argument long-term investors might have for DISH, and that the company is absolutely trying to communicate to the market, is the way they have decided to evolve their business. Since 2008, the company has spent more than $11 billion buying wireless spectrum frequencies in order to build their own 5G wireless network. Their founder and CEO relinquished his role as chief executive at the end of 2017 to focus on developing that part of the business. The challenge is that the company is generating zero revenue from the licenses they hold, and they won’t begin to see any return on their already large and ongoing investment until they complete the buildout of their network sometime in 2020. So is DISH a “dead cat bounce” that only a fool would try to work with, or a real bargain opportunity? Here’s a few numbers to consider that might help you make your own decision.

    Fundamental and Value Profile

    DISH Network Corporation is a holding company. The Company operates through two segments: Pay-TV and Broadband, and Wireless. It offers pay-TV services under the DISH brand and the Sling brand (collectively Pay-TV services). The DISH branded pay-TV service consists of Federal Communications Commission (FCC) licenses authorizing it to use direct broadcast satellite and Fixed Satellite Service spectrum, its owned and leased satellites, receiver systems, third-party broadcast operations, customer service facilities, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in its operations. The Sling branded pay-TV services consist of live, linear streaming over-the-top Internet-based domestic, international and Latino video programing services. The Company markets broadband services under the dishNET brand. The Company makes investments in the research and development, wireless testing and wireless network infrastructure. DISH has a current market cap of $7.7 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both declined modestly, with earnings decreasing at a slightly greater rate (almost 8%) than sales (6%). In the last quarter EPS actually increased almost 23% while sales declined about 1%.
    • Free Cash Flow: DISH has very healthy free cash flow of more than $2.2 billion over the last twelve months, despite its decline from a little over $2.4 billion in late 2017.
    • Debt to Equity: the company’s debt to equity ratio is 2.07, which is high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have, with adequate liquidity from their cash flow to provide additional stability and flexibility. High debt to equity ratios are also pretty normal for this industry.
    • Dividend: DISH does NOT pay a dividend, which is normal for stocks in the Media industry.
    • 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 DISH is $15.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.14. 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 Media industry is 2.2, and the historical average for DISH is 6.53. The stock would have to move above $100 to be at par with the its historical average. While I believe that is an over-optimistic target on even a long-term basis, it does suggest that the stock’s 52-week high, which was $66 in July of last year, is useful and within striking distance over time.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The red, dotted diagonal line traces the stock’s decline and concurrent downward trend for the past year. The stock has been rebounding since the beginning of this month but is now pushing directly up against that downward trend, which should push the stock back down to retest its recent pivot low around $29. A drop back down from that line, to around $31 would be a good sign that the “dead cat bounce” effect is at play. On the other hand, a push above the line to the $35 level, or better, $36 should give the stock some good short-term momentum to push up to the $40 level. That’s a range that short-term traders could find useful for a bullish trade. The stock would have to break above $40 to mark a legitimate reversal of the long-term downward trend.
    • Near-term Keys: Look for the stock to break above $35 per share. A move above this level could be a good opportunity to enter a bullish trade, either by buying the stock or working with call options. A move below $31, on the other hand could suggest the stock’s downward trend will reassert itself and push the stock even lower than $29, which could be a good opportunity for a bearish short-term trade by either shorting the stock or working with put options.


  • 26 Jun
    EMN dipped below $100 today. Is it a good buy?

    EMN dipped below $100 today. Is it a good buy?

    Trade tensions seem to have finally caught up to the market, as the last week has prompted investors to start selling. Despite today’s rally, the S&P 500 is off about 2.2% from a high point around 2,788 earlier this month. Those tensions have particularly followed U.S. stocks that do a significant portion of business overseas, and even more specifically those with major exposure in China. EMN fits that description; as of March of this year, the company estimated that 28% of its business came from the Asia/Pacific region, with the lion’s share of that business in China. That has pushed the stock off of its all-time highs around $110 in the last couple of weeks to its current price. A drop of about 10% in price marks a significant retracement and correction of the stock’s long-term trend, which is still more than 50% higher than it started a year ago. The stock is approaching an important support level that could mark a major turning point for investors.

    I think that despite the stock’s getting solid fundamental profile, and recovery to the stock’s previous highs is anything but a given, especially given the preference shown so far by both the U.S. and its trading partners to escalate trade tariffs. The market abhors any kind of conflict that could impact trade, and so I think the near-term risk for stocks like EMN is that the absence of satisfactory resolutions is going to limit their upside. The larger risk is that those tensions could force prices even lower and push these stocks into longer-term downward trends. EMN is very close to what I think it is an important signal point that investors can use to plan their strategy in either direction.



    Fundamental and Value Profile

    Eastman Chemical Company (Eastman) is an advanced materials and specialty additives company. The Company’s segments include Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. In the AFP segment, it manufactures chemicals for products in the coatings, tires, consumables, building and construction, industrial applications, including solar energy markets, animal nutrition, care chemicals, crop protection, and energy markets. In the AM segment, it produces and markets its polymers, films, and plastics with differentiated performance properties for end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support its specialty operating segments. Its product lines in Fibers segment include Acetate Tow, Acetate Yarn and Acetyl Chemical Products. EMN has a current market cap of $142.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew almost 22% while sales grew about 13%. Growing earnings faster than sales isn’t easy, and over time isn’t really sustainable, but it is also a positive mark of management’s ability to maximize their business operations.
    • Free Cash Flow: EMN has generally healthy free cash flow of $939 million over the last twelve months. This number has improved markedly since June of last year, when free cash flow was a little over $650 million.
      Debt to Equity: the company’s debt to equity ratio is 1.12, which is a little high; levels at 1 or below are preferred. However, the company’s balance sheet indicates operating profits are more than adequate to service the debt they have.
      Dividend: EMN pays an annual dividend of $2.24 per share, which translates to an annual yield of 2.22% 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 EMN is $39.40 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.55. 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 Chemicals industry is 2.8, and the historical average for EMN is 3.0. That translates to about 15% upside in the stock right now, which would push its price a little above its 52-week highs.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: Since early March, the stock has operating within a range between about $100 on the low side and $110 on the top end. The chart above uses the red diagonal line to trace the stock’s upward trend from August of last year to its peak in March, and then calculate Fibonacci retracement levels. Today’s movement has the stock possibly breaking the first level of Fib support. That’s interesting, but the real signal is at the next level, shown as the 50% retracement level (technically not a Fibonacci number, but still often an important level of emotional price activity) at around $97 per share. That range also coincides with the stock’s long-term trend line as calculated by a 200-day moving average and which is taken by technical traders as an important indicator of the stock’s long-term trend. The stock could use that level as support anywhere between its current price and $97, which would generally confirm the long-term trend. On the other hand, a break below $97 could mark a critical reversal point where the long-term trend shifts from up to down.
    • Near-term Keys: Watch the stock’s activity between $100 and $97 per share. A pivot back to the upside, with a push above $101, would certainly suggest the stock should at least push back into the $110 range and could offer a good short-term bullish trade by buying the stock or using call options. A break below $97 would probably not see any kind of pause in downward momentum until about $93 per share, or in more extreme cases, possible as low as the $85 to $86 range. If you don’t mind working with downward price patterns and trends, that could be an opportunity to short the stock or to work with put options.


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