Retail

  • 19 Sep
    Retail stocks are up – but there’s a good reason why DDS isn’t following suit

    Retail stocks are up – but there’s a good reason why DDS isn’t following suit

    Perhaps it’s an indication of over-exuberance that the market has lately seemed to just shrug off the latest global trade news. It could also be that investors have come to accept tariff threats and trade tensions as “the new normal.” Either way, it is interesting that while the Trump administration imposed a new set of tariffs on China, the market today decided to use the fact that the tariffs were set at a lower-than-expected 10% instead of the 25% that many had feared as a catalyst to drive higher. More →

  • 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.


  • 12 Jul
    IRBT is setting up for a bullish pop

    IRBT is setting up for a bullish pop

    Despite the uncertainty that has dominated the market for most of the year, its bullish long-term trend remains in place and has continued to provide strong support to mute any drawdown. As of this writing, the S&P 500 Index looks set to push above short-term resistance and could start testing the all-time highs it set back at the beginning of the year. That should be a positive indication for stocks in general, and even while trade war risk persists, there remain interesting opportunities to be had.

    iRobot Corp (IRBT) could be one that is setting up for a good bullish trade right now. The stock’s short-term trend is up about 45% since the beginning of May, with room yet to move up another 15% if its current momentum holds. This is a small-cap stock in the Household Durables industry that is a bit of a niche play; its products won’t appeal to every consumer, but they have a strong, building customer base, and while their focus is primarily geared toward consumer robot use, it includes forward-thinking technologies like mapping, navigation, mobility and artificial intelligence. If you’re a geek like me, you can’t really walk into a Best Buy store without at least checking out the section that includes IRBT’s products, which also means that sooner or later you’re likely to buy one of your own.


    IRBT is another stock in the Household Durables industry that could also provide some protection in the event of a trade war. The company markets their products across the globe, and so incurs some financial risk; however, as of the last quarter, international sales accounted for only about 11% of the company’s total sales. They also manufacture their products entirely within the U.S., relying on international distributors to market and sell the products abroad. What financial risk exists from their international exposure is related primarily to foreign exchange rates above all else. Their last quarterly report indicates they actively use foreign currency forward contracts and swap to hedge and minimize this risk.

    Fundamental and Value Profile

    iRobot Corporation is a consumer robot company, which is engaged in designing and building robots. The Company’s portfolio of solutions features various technologies for the connected home and various concepts in mapping, navigation, mobility and artificial intelligence. The Company sells various products that are designed for use at home. Its consumer products focus on both indoor and outdoor cleaning applications. The Company offers multiple Roomba floor vacuuming robots. Roomba’s design allows it to clean under kick boards, beds and other furniture. It offers the Braava family of automatic floor mopping robots designed for hard surface floors. The Roomba 600 series robots offer a three-stage cleaning system. The iRobot HOME Application helps users to choose cleaning options for their home. Its Mirra Pool Cleaning Robot is used to clean residential pools. The Company’s trademarks include Scooba, ViPR, NorthStar, Create, iAdapt, Aware, Home Base, Looj, Braava, vSLAM and Virtual Wall. IRBT has a current market cap of $2.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased almost 27%, while sales increased nearly 29%. These are healthy numbers that indicate their business is growing aggressively. The company’s margins are a bit narrow at around 5% for the past year, although in the last quarter this number did increase to almost 10%.
    • Free Cash Flow: IRBT’s Free Cash Flow is healthy, and since they have no long-term debt, their operating profits can be directed almost completely to facilitate growth and continued innovation.
    • Debt to Equity: IRBT has a debt/equity ratio of .0, which as already mentioned means they have no long-term debt. Any short-term needs can be covered by their operating profits, along with more than $100 million in cash and liquid assets.
    • Dividend: IRBT does not pay an annual 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 IRBT is $17.69 per share. At the stock’s current price, that translates to a Price/Book Ratio of 4.58. The average for the Household Durables industry is 5.9, while the historical average for IRBT is only 3.3. Comparing the current Price/Book ratio to its historical average means the stock is overvalued, however in this case the industry average is also constructive. A move to par with the industry average would translate to a stock price of more than $104 dollar per share, which is near an all-time high which the stock reached temporarily a year ago.


    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 decline from its all-time high at nearly $110 per share to its downward trend low in early February around $56. The stock finally picked up enough bullish momentum to sustain a strong upward trend beginning in May, driving from that low point to its current price. Since that time, the stock has moved in a nice stair-step pattern, with a recent pullback to support at around $75 before bouncing higher to its current price. The green horizontal line marks previous pivot points that I think could act as an important test of the upward trend’s longer-term strength if its current bullish momentum tapers off; an upward bounce from that level should provide a good catalyst to keep the stock moving higher. The red horizontal lines on the right side of chart mark Fibonacci retracement levels of the downward trend that could provide resistance to a sustained move higher. If the stock breaks above the most immediate resistance around $83, for example it should easily test its short-term pivot high above $90, with a longer-term target around $103 possible from there.
    • Near-term Keys: Watch the $83 level; a break above that resistance should provide a good signal to enter a bullish trade, either by buying the stock outright or by working with call options. If the stock begins to retrace from its current price, pay attention to support around $72. A bounce higher from that level could also provide a good bullish trading set up at a lower price point. If the stock breaks below $72, on the other hand, the stock’s mostly downward longer-term trend would be reasserting itself, and the stock would likely see little support before dropping back into the $56 to $60 level to retest its 52-weeks lows. That could translate to a decent opportunity if you like working with put options or with short sales.


  • 06 Jul
    The trend is a friend for AEO

    The trend is a friend for AEO

    A popular maxim among technical traders states that “the trend is your friend.” The logic is pretty simple; when you’re trying to decide which way to work with a stock (bearish or bullish), you should use the stock’s trend as your guide. If you’re thinking about taking a position that could cover 3 month’s of time or more, the smart way to apply the rule is use the stock’s long-term trend for that reference.

    This approach works against the mindset of value-oriented and contrarian investors, because it opens up your investment universe to stocks that are already trading at high multiples of the price ratios more conservative methods use. The advantage that it offers, however is pretty simple: just because a stock is already trading at a high level does not automatically mean it is due to reverse and move down. It is also true that in order for a stock to establish a new high, it has to break above its latest high. American Eagle Outfitters, Inc. (AEO) is a great example of a stock that is the midst of a strong, long-term upward trend, and that could be setting up for another strong push even higher.

    The trend for AEO is following a very similar track to the Consumer Discretionary sector in general, which is where this Specialty Retail stock fits. The entire sector has pulled back just a bit from recent peaks over the last week or so, and it is true that it could drop a little further. The strength of that longer trend, however means that the entire sector, and AEO specifically, is more likely in the near future to turn back to the upside and offer investors an opportunity to ride the stock a little further.



    Fundamental and Value Profile

    American Eagle Outfitters, Inc. (AEO Inc.) is a multi-brand specialty retailer. The Company offers a range of apparel and accessories for men and women under the American Eagle Outfitters Brand (AEO Brand), and intimates, apparel and personal care products for women under the Aerie brand. AEO Inc. operates stores in the United States, Canada, Mexico, Hong Kong, China and the United Kingdom. As of January 28, 2017, the Company operated over 1,000 retail stores and online at ae.com and aerie.com in the United States and internationally. Its company-owned retail stores are located in shopping malls, lifestyle centers and street locations in the United States, Canada, Mexico, China, Hong Kong and the United Kingdom. Its other brands include Tailgate and Todd Snyder New York. Tailgate is an apparel brand with a college town store concept. Todd Snyder New York is a menswear brand. As of January 28, 2017, the AEO brand operated 943 stores and online at www.ae.com. AEO has a current market cap of $4.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing almost 44%, while sales increased about 8%. 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 a management’s ability to maximize their business operations.
    • Free Cash Flow: AEO’s Free Cash Flow is healthy, at a little over $235 million. That number has increased in each of the past three quarters.
    • Debt to Equity: AEO has a debt/equity ratio of 0, which means they carry little to no debt. That fact translates to a much lower level of financial risk for the company than most of its competitors carry. The company has good liquidity, with a little over $309 million in total cash and liquid assets. This also represents a significant improvement over the last year, when cash was around just $190 million.
    • Dividend: AEO pays an annual dividend of $.55 per share, which at its current price translates to a dividend yield of about 2.33%.
    • 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 AEO is $6.84 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.44. The historical average for the stock is only 2.5, suggesting the stock is overvalued by almost 50%, but the average for the Specialty Retail industry is 6.8, which is a reflection of current market conditions, as investors have consistently shown a willingness to price stocks in this industry at high multiples when the opportunity seems right. A target price of $46 per share, which is where the stock would be at par with the industry average, is probably not realistic, considering that its price has never exceeded $32 per share; it does, however suggest that a target somewhere in the $30 to $31 range under current conditions is probably not unreasonable.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: The diagonal blue line traces the stock’s upward trend over the past year, while the dashed red and green lines highlight the narrow trading range the stock has held between $23 and $25 for the past month or so. Don’t be surprised if the stock pushes below its immediate support at $23 to test the long-term trend line’s support somewhere around $21.
    • Near-term Keys: If the stock can find a new surge of bullish momentum, it could break above the stock’s current high, and resistance around $25. That could give way to another surge to the $28 to $30 range. If the stock retraces back to around $21 and then pivots back to the upside, an aggressive trader would be tempted to bet on a resumption of the upward trend, but the higher probability trade would be to wait for a solid break above $25. The stock could break that upward trend line support, and if it goes even further to drop below pivot low support around $19, its next low could be found in the $13 to $14 range.


  • 20 Jun
    Will DKS break out, or break down?

    Will DKS break out, or break down?

    At the end of May, Dick’s Sporting Goods (DKS) released its latest quarterly earnings report, and the numbers soundly beat Wall Street’s expectations. That spurred the stock, which had been mostly range-bound since the beginning of the year, to break out in a big way, with an overnight move of more than 26% to around $38 per share. More →

  • 18 Jun
    WBA looks like it could be ready to break out

    WBA looks like it could be ready to break out

    If you pay attention to the Pharmacy segment of the Food & Staples industry, a lot of the attention over the last few months has focused on companies other than the stock I’m highlighting today. Amazon (AMZN) doesn’t work in this space, but after acquiring Whole Foods last year, the market loves to guess about their next vertical acquisition target. Rumors not long ago that they might start looking at ways to enter the pharmacy business sent a lot of investors running away from the established companies in this segment as quickly as possible. CVS Health Corporation (CVS) caught some buzz by announcing their intentions to acquire Aetna Inc. (AET), another example of vertical integration with some intriguing implications and opportunities for the future. And while Walgreens Boots Alliance Inc. (WBA) hasn’t been sitting idle, their acquisition of more than 1,600 Rite Aid (RAD) stores for about $3.6 billion in cash this spring didn’t really turn many heads. It’s a more traditional, consolidation-oriented transaction that I guess just doesn’t boast the sexy sheen that excites investors right now.

    That’s actually too bad, because if you dive into WBA’s fundamental and technical profile, you see a stock that looks like it could be poised on the verge of a bullish long-term trend reversal. It’s true that none of the effects – including the $3.6 billion spent to acquire those RAD stores, or the increase in debt that will probably be a natural result from it – have yet to be seen in any financial disclosures, but the company is scheduled for its first quarterly earnings announcement since the purchase closed on June 28. Depending on what kind of information is provided, that report could act as a strong upside catalyst. Let’s dive into the details as they currently stand.



    Fundamental and Value Profile

    Walgreens Boots Alliance, Inc. is a holding company. The Company is a pharmacy-led health and wellbeing company. The Company operates through three segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The Retail Pharmacy USA segment consists of the Walgreen Co. (Walgreens) business, which includes the operation of retail drugstores, care clinics and providing specialty pharmacy services. The Retail Pharmacy International segment consists primarily of the Alliance Boots pharmacy-led health and beauty stores, optical practices and related contract manufacturing operations. The Pharmaceutical Wholesale segment consists of the Alliance Boots pharmaceutical wholesaling and distribution businesses. The Company’s portfolio of retail and business brands includes Walgreens, Duane Reade, Boots and Alliance Healthcare, as well as global health and beauty product brands, including No7, Botanics, Liz Earle and Soap & Glory. WBA has a current market cap of $63.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 27%, while sales grew a little over 12%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
    • Free Cash Flow: WBA has solid free cash flow of a little over $6.3 billion over the last twelve months. This number has declined a bit from the first quarter of 2017, when it was a little over $7 billion, but is much higher over the last four years, when it hit a low in June of 2014 at around $2.5 billion. This number should drop again in the next quarter as a reflection of the RAD stores purchase, though exactly how much it will drop remains to be seen.
    • Debt to Equity: the company’s debt to equity ratio is .44, which is low and should generally be quite manageable. Long-term debt has also dropped by more 30% over the last two years, from around $19 billion to the levels reported in its last earnings report. This is another number that I expect will increase, but how much also remains to be seen.
    • Dividend: WBA pays an annual dividend of $1.60 per share, which translates to an annual yield of 2.5% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WBA is $28.42 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.25. This is inline with the industry average, which is 2.3, but below with the stock’s historical average of 2.9. A rally to par with the historical average would put the stock’s price above $82 per share – almost 30% above its current price. This really suggests the stock is legitimately undervalued right now.



    Technical Profile

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

    • Current Price Action/Trends and Pivots: WBA’s downward trend started in September of last year, which marks the beginning point for the diagonal red line on the chart above. The downward trend has extended to the current date, with the stock finding consistent support around $62 in April, May, and earlier this month. It also appears to be dropping lower right now off of pivot high resistance around $65 per share. That range – $62 to $65 – has defined a pretty consistent trading range since April, and would mark the levels the stock would need to break to either extend the downward trend even lower or reverse the trend and begin to reclaim its previous highs.
    • Near-term Keys: The key for WBA is most likely to come from its June 28 earnings announcement, so investors would be wise to watch the stock’s price from that point forward. A break above $65 would probably offer a good short-term bump to at least $70 per share, with its January peak around $80 – which would be nearly at par with its historical Price/Book ratio – attainable as a longer-term target. If the stock breaks below $62, it could drop as low as $51 before finding new support, based on historical pivots below the the $62 range.


  • 15 Jun
    U.S.-China trade war could really hurt WMT

    U.S.-China trade war could really hurt WMT

    This morning marked the opening of yet another chapter in the drama that is U.S. trade diplomacy. The Trump administration announced this morning that U.S. Customs and Border Protection will begin to collect tariffs on the first $34 billion worth of Chines imported goods on July 6. This is the next step in the implementation of duties first announced in March of this year on approximately 1,300 different finished goods imported to the U.S. by its largest trading partner. The final $16 billion of a proposed $50 billion total of tariffs is still under review.

    This is a clear escalation of the two nation’s ongoing trade dispute, and not surprisingly China responded quickly, saying that they will act quickly to “take necessary measures to defend our legitimate rights and interests.” They have previously threatened their own set of tariffs on a wide ranging list of U.S. product ranging from soybeans and meat to whiskey, airplanes and cars.



    It’s one thing to watch the news and listen to talking heads wring their hands and bemoan the negative effects that an extended trade war would have on economic growth. And that’s not to say that they’re wrong; over the long-term, a trade war could bleed into virtually every part of the U.S. economy. Keep in mind that virtually every kind of finished product uses steel or aluminum, which is the basis for the first round of tariffs that Trump first started talking about three months ago. The real question for the average American is where those negative effects are most likely to be seen hitting their wallet. I think one of the first, and most vulnerable places can be found not far from where you live. Walmart Inc. (WMT) sources 75% of its merchandise from China, and that puts one of the largest retailers in the country literally on the cutting edge of what is happening right now.

    This isn’t an unrealistic argument; one of the ways WMT has always differentiated itself from its competitors is as the low-cost leader for consumers. The longer a trade war takes to find a resolution, the more their costs on the vast majority of goods that fill their shelves are going to rise. As you’ll see below, WMT simply doesn’t have much ability to absorb those costs to keep them from passing through to their customers. That begs a question that only each customer can answer: if that item – whether it be a shirt, a power tool, a toy, or an electronic gadget – that you’re used to getting from WMT costs 25% or more than it used to, are you going to be more or less likely to buy it?

    Current consumer trends suggest that in the case of luxury items – say, an $80 shirt – a lot of consumers that are already willing to pay that much for a shirt will probably also pay $90 to $100 for the same item. That is usually less true when the conversation shifts instead to bargain-priced items, like a $20 shirt. That puts WMT in the very difficult position of watching its operating margins erode even more by absorbing increasing costs to keep sales high or pass those costs to their customers, who may simply choose not to make the same purchases they used to. Neither scenario works out very favorably for the company’s bottom line.



    Fundamental and Value Profile

    Walmart Inc., formerly Wal-Mart Stores, Inc., is engaged in the operation of retail, wholesale and other units in various formats around the world. The Company offers an assortment of merchandise and services at everyday low prices (EDLP). The Company operates through three segments: Walmart U.S., Walmart International and Sam’s Club. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States operating under the Walmart brands, as well as digital retail. The Walmart International segment consists of the Company’s operations outside of the United States, including various retail Websites. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com. The Company operates approximately 11,600 stores under 59 banners in 28 countries and e-commerce Websites in 11 countries. WMT has a current market cap of $246 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by 14%, while sales grew a little over 4%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations. Diving a little deeper, however provides a good look at the reason you should be concerned about increasing costs from tariffs on Chinese goods. As of the company’s last earnings report, WMT had more than $500 billion in revenue, with net income of almost $9 billion. Net income is calculated by subtracting the costs of doing business from revenues, which it means it provides the baseline for the earnings per share number you and I use to measure a stock’s profitability. Comparing net income to total revenues gives you an idea about what kind of profit margin the company is working with. For WMT, that number is only 1.77%, a very low number that implies they work with very narrow operating margins.
    • Operating Trends: WMT has been doing a great job of growing revenues, and since late 2014 they’ve grown from about $470 billion to their current level of a little over $500 billion. Over the same period, the reverse is true about their net income, which has dropped more than 50% from a high a little above $17 billion to just under $9 billion currently. That negative trend is also reflected in the decline of net income as percentage of revenue, which was about 3.6% at the end of 2013 but, as already observed is now only 1.77%. The company’s margins have already been under considerable pressure for some time, which further bolsters the argument they just don’t have a lot of wiggle room to work with.
    • Debt to Equity: the company’s debt to equity ratio is .46, which is low and should generally be quite manageable. WMT has also done a good job decreasing their total long-term debt since the first quarter of 2014, from more than $45 billion to a current level of about $29.4 billion.
    • Dividend: WMT pays an annual dividend of $2.08 per share, which translates to an annual yield of 2.49% 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 WMT is $26.44 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.15. This is below the industry average, which is 4.0, but inline with the stock’s historical average, which to me suggests the stock is fairly value right now, with limited upside potential in the long-term.



    Technical Profile

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

    • Current Price Action: The stock has declined from a high around $110 in January to its current level around $83. That’s a drop of more than 25%, which at first blush might look pretty good for a stock that a lot of value investors would say has a lot of stickiness; that is, they will continue to generate high revenues even if a healthy economy begins to struggle, because consumers will continue to spend their money there. That is a true statement when it comes to WMT, but as observed above, I think the risk comes from what will happen as their costs increase. Will they continue to generate attractive profits, or will their margins erode? The risk is much higher they will erode.
    • Trends and Pivots: I’ve drawn two lines to illustrate where I think the stock’s real downside lies right now. The horizontal red line is just below the stock’s current level at about $82 and appears to be acting as good support right now. The horizontal blue line is drawn at the stock’s multi-year low, which was reached in February of last year at around $66. The red bidirectional arrow emphasizing the $16 per share difference between the stock’s current price and that low point is, I think a clear indication of investor risk right now. That’s a downside risk of just a little less than 20% right now. I also see little reason – fundamental or technical – to suggest the stock should reverse the intermediate-term downward trend anytime soon, which means that risk right now is much higher than any potential reward.
    • Near-term Keys: Watch the stock’s movement carefully over the next few days. A move to $90 would mark a reversal the intermediate trend’s downward strength and would act as a good signal point for a good bullish trade, either by buying the stock or working with call options. On the other hand, a drop below $82 would mark a major support break, with a drop to the aforementioned $66 level likely before any new significant support is reached.


  • 12 Jun
    Why Best Buy (BBY) is more like a “bust buy” right now for investors

    Why Best Buy (BBY) is more like a “bust buy” right now for investors

    We all love seeing stocks go up. When a stock’s upward trend lasts for several months, a year, or more, that movement usually translates to big-profit, “home run” trades for those who had the sense to jump in early. BBY is a great example of exactly that kind of trade. It’s a stock that, as of this writing is trading only a few dollars per share away from its all-time high and has more than doubled in price over the last two years. If you weren’t one of those fortunate few who saw the opportunity to get in two years ago, but you saw the strength of the stock’s long-term trend, you’d probably be tempted to consider buying in. The question is, how much opportunity is left, and how much risk do you have be willing to accept for whatever upside remains? Let’s take a look.

    Fundamental and Value Profile

    Best Buy Co., Inc. is a provider of technology products, services and solutions. The Company offers products and services to the customers visiting its stores, engaging with Geek Squad agents, or using its Websites or mobile applications. It has operations in the United States, Canada and Mexico. The Company operates through two segments: Domestic and International. The Domestic segment consists of the operations in all states, districts and territories of the United States, under various brand names, including Best Buy, bestbuy.com, Best Buy Mobile, Best Buy Direct, Best Buy Express, Geek Squad, Magnolia Home Theater, and Pacific Kitchen and Home. The International segment consists of all operations in Canada and Mexico under the brand names, Best Buy, bestbuy.com.ca, bestbuy.com.mx, Best Buy Express, Best Buy Mobile and Geek Squad. As of December 31, 2016, the Company operated 1,200 large-format and 400 small-format stores throughout its Domestic and International segments. BBY’s market cap is $20.6 billion.



    • Earnings and Sales Growth: Over the last twelve months, earnings decreased by about 36%, while sales grew modestly. It’s generally difficult for a company to grow earnings faster than sales, and in the long term can’t be expected to continue, but it is also a positive sign of management’s ability to maximize their business operations.
    • Free Cash Flow: Free Cash Flow has declined since the first quarter of 2017 but remains healthy at more than $1.3 billion over the past twelve months.
    • Debt to Equity: the company’s debt to equity ratio is .23, a very low number that is very positive, especially when the norm for the industry is about three times higher. While operating profits are more than adequate to service debt, their total cash and liquid assets also exceed their total long-term debt by more than 4x.
    • Dividend: BBY pays an annual dividend of $1.80 per share, which translates to an annual yield of 2.43% 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 BBY is $12.13 per share. This number has declined in every quarter from a peak at around 15 at the beginning of 2017. At the stock’s current price, that translates to a Price/Book Ratio of 6.09. The industry average is higher, at a little over 12, but their historical average is only 2.9, which means the stock is trading twice as high as it has historically done from a valuation standpoint. At par with that historical average, the stock’s price would be only $35, which I think underscores the kind of risk investors who want to jump in now could be exposed to.



    Technical Profile

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

    • Current Price Action: Over the last week or so, BBY rallied strongly off of support at around $69 per share. The stock’s all-time highs were reached a little below $80 just last month, followed by a rapid sell off that drove the stock down to its latest pivot low. It is showing strong momentum at the moment as it fills the gap that came when the stock dropped from a bit above $75 to below $71 on an overnight basis late last month. That momentum is likely to be tested between $75 and $76.
    • Trends and Pivots: I’ve drawn two diagonal lines to illustrate the shift in the stock’s intermediate trend. The blue dotted line represents the trend up to the stock’s mid-May drop. Before that point, the trend provided good support that helped the stock rally to its January high and even establish a new all-time high price at nearly $80 per share; however the stock’s drop at the end of the month below that line, with new pivot low support at around $69, forced a redraw of that trend, illustrated by the dotted green line. The more gradual angle of that line implies a weakening of the intermediate trend, and a break below that support point would mark a major trend reversal that should see the stock drop to at least $62 before finding new support. The horizontal orange line at around $75 indicates where I think the stock is likely to find its next resistance point, and the red horizontal line is near the stock’s all-time highs. In order to extend the stock’s long-term trend further, it would need to break this level. For the time being, this is also where I believe the stock’s maximum foreseeable upside is. That puts the potential upside right now at $7, with downside at $11. That’s a reward: risk ratio of .63:1; smart traders and investors look for this ratio to be 2.5 or 3:1 at minimum.
    • Near-term Keys: Watch the stock’s movement carefully. If the stock manages to push above $80, it would establish new all-time highs and force a complete reevaluation of the reward: risk profile I just outlined. On the other hand, a break below $69 – which I believe is more likely – would see the stock drop as low as $62 per share in the near term, which might offer an attractive bearish trade, either by shorting the stock or using put options.


    By Thomas Moore Investiv Daily Retail
  • 16 Nov
    These Two Chinese Retail Giants Could Deliver HUGE Returns

    These Two Chinese Retail Giants Could Deliver HUGE Returns

    • I’ve created simple models that estimate future earnings and stock price potential for two of China’s biggest retailers, JD.com and Alibaba.
    • In addition to their potential, we’ll also discuss their risks.
    • I recommend checking out yesterday’s article about the Chinese e-commerce market before jumping into today’s.



    Introduction

    Yesterday we discussed the Chinese retail environment and discussed what to look for when searching for a good investment.

    Today, I’ll dig deeper into specific investments in order to apply my theory. I’ll dig into the biggest Chinese e-commerce players, look at what the real value they offer is at current prices, and look at the risks and rewards at this point in time. More →

  • 15 Nov
    Want To Invest In The Next Amazon? Look To China

    Want To Invest In The Next Amazon? Look To China

    • The Chinese e-commerce environment has been booming and is expected to continue to do so.
    • I’ll describe the most important trends to look for in potential investments.
    • It’s highly likely that a rising tide will raise many boats, but run when it shifts.



    Introduction

    E-commerce has been developing the world over in the past 20 years, and the clear winner in the game has been Amazon (NASDAQ: AMZN). AMZN’s stock performance has also been stellar. More →

    By Sven Carlin China Investiv Daily Retail
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