Value Traps

  • 10 Dec
    Transports are down 16% since September – but that doesn’t make SKYW a good bargain

    Transports are down 16% since September – but that doesn’t make SKYW a good bargain

    The market hasn’t been kind to the Transportation sector since the end of the third quarter of the year. As measured by the S&P Transportation SPDR ETF (XTN), the sector declined from its 52-week highs at the beginning of September nearly 20% by Halloween before staging a temporary rally through November. Since the beginning of the month, however the sector has dropped back near to its yearly lows. More →

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

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

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

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

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

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

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

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



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

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

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



    Fundamental and Value Profile

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

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



    Technical Profile

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

     

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


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

    Is AVY another great bargain in the Materials sector?

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

  • 14 Nov
    AAPL is down big since October – how much is it actually worth?

    AAPL is down big since October – how much is it actually worth?

    Apple Inc. (AAPL) is one of the biggest companies in the world; in August of this year, with the stock pushing nicely above $200 per share, they were the first company in the modern era to officially cross the $1 trillion dollar threshold. And over the last ten years, it is without a doubt one of the biggest performers throughout the course of the bull market. Along with its big tech brethren like Alphabet (GOOGL), Amazon (AMZN) and Microsoft (MSFT), AAPL has long been one of the companies that the rest of the market seems to have taken its cues from. More →

  • 12 Nov
    Want to bet on financials? C isn’t a smart gamble yet

    Want to bet on financials? C isn’t a smart gamble yet

    One of the rising concerns that has helped keep the market on edge for the last couple of months now is the spectre that since interest rates are likely to keep rising, economic growth in the United States will inevitably have to slow or, worse reverse into a new recessionary cycle. I do think that it is true that the longer the latest expansionary cycle – which could begin to stretch into an unprecedented full decade in the next few months – continues, the more likely a new extended downward cycle becomes. That doesn’t mean the end is near, or that we know when that reversal will come; it just means that a cycle, by definition has a beginning and an end, and that in a market economy, every bullish cycle eventually and inevitably turns bearish, and every bearish cycle eventually and inevitably turns bullish.

    One of the real tricks to being able to keep your money working for you no matter what the broader economy and market’s trend is doing is being able to recognize that opportunities exist in every kind of cycle. I was reminded about that recently while listening to a few analysts talking about current market conditions. The discussion closed with the moderator asking these experts where each one thought some of the smartest places to put their money right now would be. It wasn’t too surprising when a couple of them singled out the financial sector.



    The premise is simple enough: rising rates are good for fixed-income investors, because they can get a higher yield on “safer” investments like bonds and short-term instruments. That’s usually just one piece of positive news for banks, as they see increased volume in bond purchases as well as flows into shorter-term instruments like money markets, Treasury bills, and certificates of deposit. That also gives them more money to offer to borrowers at higher interest rates, which often means that while other parts of the market are experiencing turbulence and increased volatility, financial stocks like banks become part of the “flight to quality” that are often typical of the end of a bull market.

    It is a bit of a double-edged sword, however; rising interest rates can only continue for so long before the economy inevitably begins to slow, because at some point interest rates become high enough that borrowing becomes prohibitively expensive. In the financial crisis that triggered the last recessionary cycle from 2008 to 2009, the store was made even worse by the realization that mortgage companies and banks had over-leveraged themselves with subprime loans – loans that charged higher interest rates to borrowers with poor credit quality. The problem was that when the economy began to slow, these loans became almost completely non-productive. The federal government took steps in the years following to regulate subprime lending more closely, and so there isn’t likely to be the same kind of risk now that existed ten years ago. Even so, it is a cautionary tale worth noting, because the truth is that even banks, insurance companies and investment institutions remain at risk when the economy slips into recessionary conditions.

    If you want to watch the financial sector right now, it’s smart to keep a cautious eye, and to look for stocks that represent an excellent value. Citigroup Inc. (C) is a good example; since hitting a 52-week high at nearly $81 in late January of this year, the stock began an extended slide downward, falling all the way to the $65 level by the beginning of July. It stages a short-term bullish trend from that point, rallying to around $75 in late September before dropping back to a new 52-week low around $63 in late October. As of this writing, the stock is back around $65 price level – a price that might offer a tempting opportunity for somebody looking for a good value play in the financial sector. But is C really a stock that is worth investing your hard-earned dollars right now? You decide.



    Fundamental and Value Profile

    Citigroup Inc. (Citi) is a financial services holding company. The Company’s whose businesses provide consumers, corporations, governments and institutions with a range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, trade and securities services and wealth management. The Company operates through two segments: Citicorp and Citi Holdings. Citicorp is the Company’s global bank for consumers and businesses and represents its core franchises. Citicorp is focused on providing products and services to customers and leveraging the Company’s global network, including various economies. As of December 31, 2016, Citicorp was present in 97 countries and jurisdictions, and offered services in over 160 countries and jurisdictions. Global Consumer Banking (GCB) provides traditional banking services to retail customers through retail banking, including Citi-branded cards and Citi retail services. C has a current market cap of $165.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased 22.5%, while sales increased almost 10%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of management’s ability to maximize their business operations. The company’s Net Income versus Revenue tells an interesting story, since over the last twelve months it was actually -5.4%, but in the last quarter improved to more than 18.5%, pointing to major improvement in the company’s margin profile.
    • Free Cash Flow: C’s Free Cash Flow is strong, at more than $21.5 billion. This is a number that has increased throughout 2018, but before that point had declined from a high in late 2015 of about $65 billion.
    • Debt to Equity: C has a debt/equity ratio of 1.32, which appears high, but it should be noted that most banks carry higher debt levels as a normal course of their business. It should be noted that despite the high debt/equity ratio, the company’s cash and liquid assets are more than 3 times higher than the total amount of long-term debt on their balance sheet.
    • Dividend: C pays an annual dividend of $1.80 per share, which at its current price translates to a dividend yield of about 2.73%.
    • 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 C is $69.58 per share. At the stock’s current price, that translates to a Price/Book Ratio of .94, which at first blush seems very low; however, the stock’s historical average is only .8. The stock is also trading about 22% above its historical Price/Cash Flow ratio. Together, those two measurements put the stock’s fair value at somewhere between $52 and $55 per share, which is well below the stock’s current price. The stock would actually have to drop below $45 to be considered a useful discount relative to its historical Price/Book value.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The chart above displays the stock’s price action for the last year. The decline from the stock’s September peak at about $75 marks a decline over the past six weeks or so of about 12% at the stock’s price as of this writing. It has strong support between $63 and $65 per share, while near-term resistance should be seen around $69, with $72 and $75 acting as secondary resistance points if the stock can begin to stage a bullish rally.
    • Near-term Keys: A short-term trade right now is pretty speculative on this stock, no matter whether you want to trade the bullish side by buying the stock outright or to start working with call options. A bearish trade also is a very low probability proposition right now given the stock’s current support level; the only decent signal on this side would come if the stock break below $65. In that case, the next likely support level would be in the $57 to $58 range, so there could be an interesting opportunity to short the stock in that case or work with put options. While the company has some interesting fundamental strengths, I think that it remains a bit expensive right now, even with the stock’s current decline for most of the year. I wouldn’t really be very interested in working with this stock unless and until it drops into the $44 to $45 range. That would take a decline from its current price of a little more than 30%, which really the biggest reason I don’t think this is a risk worth taking right now.


  • 01 Nov
    Does BBBY’s low Price to Book Value point to big value – or big risk?

    Does BBBY’s low Price to Book Value point to big value – or big risk?

    Some of the first important metrics I learned about when I started studying fundamental and value analysis years ago revolved around identifying how much a stock should be worth versus what it’s current trading price really is. At its core, the principle is simple enough; if the stock is trading lower than what the value of the underlying business is, what you may be looking at is a terrific bargain opportunity. More →

  • 24 Oct
    What is a good price for CAT?

    What is a good price for CAT?

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

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

    Want to get defensive? Stay away from this value trap

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

  • 11 Oct
    SIG: value stock, or value trap?

    SIG: value stock, or value trap?

    Sometimes, answering the question of whether a stock represents a legitimate, attractive value opportunity can be hard to do. A company could be struggling not only to grow its business, but may be forced to restructure its business in a way that makes most of the traditional measurables investors like to use look very unfavorable. More →

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