SYMC looks like a value trap!

August 30, 2018

SYMC looks like a value trap!

The market looks like it’s trying to reclaim the long, extended upward run it’s been following since late 2009. This week, following the announcement of a new trade deal between the United States and Mexico, the market finally broke above the all-time high it set in January of this year before dropping back a little over 10%. It was enough to make investors nervous and start worrying that the end of the bull market was at hand. Are we now seeing the market swing back for yet another extension of the bull market for the foreseeable future? Maybe.

The nice thing about the volatility we’ve been seeing in the market for the last eight months is that it has pushed a lot of stocks in practically every sector and industry to price levels far enough below their January highs to make them start to look like they could be good bargains now. And in the event you can find a stock in a long-term downward trend, trading at or near to historical lows, you might be even more tempted to bet you’re getting in close to the bottom, with lots of room to move upward in concert with the broad market’s newfound momentum.

As a value-oriented investor, the mindset I just outlined is something I try to work with every day. I spend a lot of time screening stocks throughout the market and try to analyze not only their fundamental strength but also how much I think they should be worth over the long-term. The danger in value investing is that sometimes a cheap stock is cheap for really good reasons, but those reasons aren’t always immediately obvious; in fact, at first blush, you might think that things look pretty good for the stock, while in fact there are danger signs lurking just below the surface, and all the harder to see or recognize quickly. These are called value traps, and they can cost you a lot of money if you aren’t careful.

While a lot of sectors have dropped, or struggled just to maintain any kind of sign of stability over the last few months, the technology sector has been the primary exception. The biggest out-performers so far this year are almost invariably technology and software stocks. Seeing the market swing to a new all-time high now should encourage you to look at this sector some more, because there are some fundamentally great companies in this sector that are currently trading at very nice valuation levels. Beware, however, because there are also other stocks that really represent a lot of risk right now – risk that I don’t believe justifies their potential reward. Symantec Corporation (SYMC) is one of those risky plays that I’m going to go ahead and call a value trap right now, because based on some of my most important metrics, the stock could be trading at a major discount right now. There are some problems, however that I think make this a stock that investors should think twice about before making any kind of trade.

Fundamental and Value Profile

Symantec Corporation is a United States-based cyber security company. The Company offers products under categories, such as threat protection, information protection and cyber security services. Under threat protection, it offers Advanced Threat Protection, Endpoint Protection, Endpoint Protection Cloud, IT Management Suite, Email Security, Cloud, Data Center Security and Cloud Workload Protection products. Under the information protection category, it offers Data Loss Prevention, Encryption, Service, VIP Access Manager, and Data Loss Prevention and CloudSOC products. The Company also offers consulting services, customer success services, cyber security services and education services. Its cyber security services include DeepSight Intelligence software, which provides an analysis of attacks. SYMC has a current market cap of about $12.8 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings grew by nearly 27%, while revenue decreased about 1.5%. That isn’t a great indication, but the situation gets a little more grim when you look at the most recent quarter. The company’s earnings declined nearly 27% – the same amount as the level of growth over the last twelve months – and revenues declined about 5.5%. Another troubling sign, and one of the main reasons that I’m calling the stock a value trap, is the fact that the company’s margins have significantly deteriorated. Over the last twelve month, Net Income was a whopping 25% of Revenues while in the last quarter it swung to a negative 5.4%. That’s a 30% swing in the wrong direction.
  • Free Cash Flow: SYMC’s free cash flow is healthy, at more than $932 million. This number has increased steadily since late 2016, when it was roughly negative $500 million.
  • Dividend: SYMC’s annual divided is $.30 per share, which translates to a yield of 1.48% 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 T is $9.53 and translates to a Price/Book ratio of 2.15 at the stock’s current price. The stock’s historical average Price/Book ratio is 3.4, suggesting the stock is almost 60% undervalued, with a long-term target price around $32 per share. That’s the trap – the value looks good, but the deterioration in earnings and their operating margin to me really just signals that worst may be yet to come.

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 downward trend over the course of the last year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock only recently found a multi-year and trend low point around $18 per share and has rebounded fairly well from that point; however the trend has also been gaining momentum since the beginning of May when the stock gapped down nearly $10 per share overnight. The stock is also about $4 per share away from resistance as shown by the 38.2% retracement line; but I believe closer resistance also rests at around $22 per share, based on two recent pivot highs in mid-May and early June.
  • Near-term Keys: Seeing $4 per share between the stock’s current price and its next resistance might look tempting for a short-term, swing or momentum focused trader, but given the strength of the stock’s downward trend over the past year, that would be an incredibly speculative trade right now, just as I believe even a long-term buy would be. If the stock breaks down and drops below the $20 level, its next likely support is around $16 per share, which means that if there is a useful signal to be had with this stock in the near future, the best probability would come by waiting for the support break, then shorting the stock or working with put options.