When I see stocks trading at or near historical highs I almost always assume that the stock is overvalued. That’s even more true if the stock is near to an all-time high and has been following an upward trend of more than a year. With the market well into year nine of the latest long-term bullish trend, the number of stocks that fit that description is much, much higher than the number of stocks that I would normally be inclined to call undervalued.
One of the reasons trends covering different time periods are important to recognize is that over those differing time ranges, the factors that carry the greatest weight isn’t always the same. Some trends are driven primarily by nothing more than current news, market sentiment and the ebb and flow of current momentum. That’s true of short-term trends. What I like to call intermediate-term trends – those that cover three to nine months, roughly – also reflects some of the same influences as short-term trends, but are often also dictated by other, somewhat broader factors, like industry or sector momentum. Longer trends, which generally cover a year or more, are usually influenced the most by national and global economic shifts and trends, and also by a company’s individualized fundamental strength.
When you get the combination of a growing, healthy economy along with a fundamentally solid company with a growing business, it’s pretty normal to see that company’s stock price trading at or near historical highs. That’s because investors will recognize the company’s ability to grow their business and jump on board for the ride. That can obviously put the stock in overbought, overvalued territory at the extreme; but one of the things that can also happen in some cases is that the stock’s higher price really just reflects the increasing inAnsic value of the underlying business.
This is an idea that lies at the heart of value investing; a company with a growing business should naturally offer greater and greater returns to stakeholders. In a private company, that usually means that the portion of profits distributed to those stakeholders should grow each year that the business grows. In a publicly traded company, the most tangible way that growth gets back to stakeholders is by an increase in the stock’s trading price. This also implies that sometimes, a stock may be trading at or relatively close to historical or even all-time highs; but if the business is strong enough, it could actually still be undervalued.
Agilent Technologies, Inc. (A) is a company that could fit this description right now. This is a stock that has been following the market’s broad upward trend since 2009 to all-time high levels; in 2009 it was trading at around $8 per share, but at the end of January was pushing to a high price around $75 per share. It’s trading at around $66 now, which means that it’s about 12% below that January high. That isn’t usually a big enough discount to make me take the stock very seriously; but a dive into the stock’s fundamentals reveals a company with an excellent pattern of growth. That is a strong validation of the stock’s extended upward trend, but there is also an interesting case to make that the stock could drive to even higher levels than the $75 peak it reached in January. That should make the stock something to watch for any value-oriented investor.
Fundamental and Value Profile
Agilent Technologies, Inc. (A) provides application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow. The Company serves the life sciences, diagnostics and applied chemical markets. It has three business segments: life sciences and applied markets business, diagnostics and genomics business, and Agilent CrossLab business. Its life sciences and applied markets business segment offers instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Its diagnostics and genomics business segment includes the reagent partnership, pathology, companion diagnostics, genomics and the nucleic acid solutions businesses. Its Agilent CrossLab business segment spans the entire lab with its consumables and services portfolio. A has a current market cap of about $21.1 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing 12% and sales by about 9.5%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile improved in the last quarter compared to the trailing twelve months, from a little over 5% (TTM) to nearly 17% (quarter).
- Free Cash Flow: A’s free cash flow is healthy, at $825 million. Free Cash Flow has also increased steadily since the second quarter of 2015 from a little over $200 million. The company also has excellent liquidity, with more than $3 billion in cash and liquid assets.
- Debt to Equity: A has a debt/equity ratio of .39. This is very low and manageable. Even more to the point, the company’s cash is more than $1.2 billion higher than their total long-term debt, with healthy margins to keep their liquidity high even as they service their debt.
- Dividend: A pays an annual dividend of $.60 per share, which translates to a yield of a little less than 1% 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 A is $14.43 and translates to a Price/Book ratio of 4.56 at the stock’s current price. Their historical average Price/Book ratio is 3.5, suggesting suggests the stock is trading at a significant premium right now; however compared to their industry average, with is more than 7.0, the stock is trading at a significant discount. It is also trading 20% below its historical Price/Cash Flow ratio. Those two elements together provide an interesting basis for a long-term target price around $80, which would mark a brand new all-time high, or possibly even higher.
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 longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. At the beginning of July, the stock found intermediate trend support around $60 per share and has been showing some upward strength and momentum from that point. The stock has immediate resistance around $68 per share, but a break above that level would confirm that short-term upward trend’s strength and could start to push that trend into an intermediate time period. The stock should have support in the $63 area from the 38.2% retracement line, with support in the $59 to $60 sitting as a critical test of the intermediate downward trend’s strength.
- Near-term Keys: If the stock breaks above $68, there could be a nice opportunity to either go ahead and buy the stock outright or start working with call options. A conservative approach could be start with a smaller than normal position size with a $75 target in mind; if the stock reaches that point, but continues to show strong bullish strength you could consider adding to the position at that point. If the stock breaks below $63, you should avoid any kind of bullish position. A drop below $59 would signal a confirmation and likely extension of the current downward trend to a long-term time frame and could provide an opportunity to short the stock or start using put options, with $55 as a short-term target, and $47 after that if you’re willing to ride the trend even lower.