• 07 Dec
    Is TGT a good value play for the holidays?

    Is TGT a good value play for the holidays?

    The numbers from what has come to be accepted as the official beginning of the holiday are in. This year’s Black Friday and Cyber Monday sales figures hit all-time records despite an overall decrease in foot traffic at brick and mortar stores. Online sales on Black Friday actually began on Thanksgiving Day, and by the end of Friday had reached a nearly 24% increase over the previous year at $6.22 billion. Cyber Monday was even bigger, with a total of $7.9 billion. In all, the numbers seem to point to a healthy holiday shopping season. More →

  • 06 Dec
    Did John Bogle really criticize his own creation?

    Did John Bogle really criticize his own creation?

    In an article for the Wall Street Journal that was excerpted from his new book, “Stay the Course: The Story of Vanguard and the Index Revolution,” John Bogle, the founder of The Vanguard Group and creator of the first index mutual fund asked an interesting question: “What happens if it (indexing) becomes too successful for its own good?” More →

  • 05 Dec
    Timing + Value = Opportunity with HUN

    Timing + Value = Opportunity with HUN

    Once the stock market bottomed at the end of October, the major market indices all rallied. Some of that rally lost steam yesterday and pushed all three major indices into negative territory for the last 30 days; but one of the sectors that really seems to have benefitted is the Materials sector. At the beginning of the week, the Trump administration announced it had come to an agreement with China to pause the imposition of any new tariffs on either side of the ocean to open the door, hopefully to more constructive discussions that lead to a useful compromise. More →

  • 04 Dec

    CAG looks like a smart value play

    Monday started the week off with a bang, as the Trump administration announced that it had reached an agreement with China to put a temporary pause on the imposition of any new tariffs. The market cheered the news, hopeful that this will be a positive step that creates constructive discussion toward a long-term compromise that works for both countries. That could give the market a pretty good lift in the short-term, but it doesn’t mean that it’s time to jump back into market with both feet yet. I think it’s still smart to be cautious. More →

  • 03 Dec
    ATVI’s -41% slump might be a good thing – but it probably isn’t over yet

    ATVI’s -41% slump might be a good thing – but it probably isn’t over yet

    One of the challenges associated with mature bull markets is the fact that they generally reflect a healthy overall economic backdrop. Why is that a challenge? Because when investors begin to recognize the fact that the economy has been healthy for a long time, the natural next question starts become how much longer it can last. Since the stock market is an emotional animal, uncertainty about the economy’s ability to keep chugging along with healthy growth numbers usually results in exactly what we have been seeing throughout practically the entire year: increased volatility that makes it harder for the market to sustain long-term trends.

    The fact is that no matter what alarmists might say or have you believe right now, the market isn’t definitively bearish right now. After reaching a new high in the beginning of October, the market dropped roughly 10% for the second time this year. A second legitimate correction in a year is a noteworthy event, since before this year, the market had managed to avoid any kind of drawdown of more than about 5% since late 2015 – and even that correction lasted only a few months before resuming the market’s longer upward trend. Until the market breaks down below its most immediately support around its February 2018 lows, however, it’s difficult to really start beating the bearish drum very hard.

    One of the sectors that has been beat down the most over the last couple of months is technology; and while the market seems to focus on hardware-driven industries, like networking and semiconductors, another segment that has seen its share of volatility is software – more specifically, software gaming companies. This is a segment that I think the market has always treated as being highly cyclical and sensitive to broad economic pressures. That makes sense up to a point, since video games and gaming consoles have historically proven to be something of a luxury item, where sales growth is easier to achieve when economic activity like job creation and wages are increasing. I’m starting to think, however that a generational shift could make this segment less sensitive than it has been – and that means that this is a market segment that could continue to perform well even if the broader economy does actually begin to slow down.



    Gaming has been around for a long time, of course, so the generational shift I’m talking about isn’t necessarily to suggest that there are going to be more gamers than their have been; in fact, there are a number of industry metrics that indicate total users could be leveling off or, in some cases even declining. The shift I think is occurring comes in the way gaming is treated as a regular activity in households.

    I’ll use my family as an example. I grew up in the early decades of video games; I can remember when Pong was a big deal, and I blew major chunks of my allowance and lawn-mowing money at the arcade on Space Invaders, Pac-Man, and about a dozen other games from that age. Gaming consoles like Atari and Nintendo quickly found a place in my home, and I was as enthusiastic about my video games as anybody. When I started my own family, I still played video games, but the demands of providing for my family, along with the other demands of life meant that gaming became nothing more than an occasional diversion for me.

    For my sons, however, gaming is a completely different story. Now in college, and working to build their own careers and lives, it’s been interesting to see how they make time to include gaming in their daily lives. Where my wife and I budget for things like dinner and a movie date nights, they budget for monthly subscriptions to their favorite games and gaming platforms, including paid updates. My sons represent the demographic that gaming companies like Activision Blizzard (ATVI), Take Two Interactive (TTWO) and Electronic Arts (EA) have been focusing their attention on for years; instead of simply trying to produce another cool game each year to generate a new batch of sales, these companies have transformed their development activities and business models to emphasize a continuous relationship with their customers, with revenue opportunities from monthly subscriptions that provide automatic updates and early release access to in-game purchase options for modules that provide specific, specialized gaming functions and features.



    My boys eat those things up, and they aren’t the only ones; it’s something that I’ve noticed really appeals to the Millennial generation. I think that means that gaming is becoming more and more a fundamental part of the economic landscape, because even if the economy does turn bearish, Millennials are going to find ways to make allowances for their games in their regular budgets. It means that while they may not become the same kind of defensive profile that I would put utilities or food and beverage companies into, I think that when the market does finally turn bearish, and even when the economy turns recessionary, gaming companies will maintain their fundamental strength far better than many analysts and experts think.

    ATVI is one of the stocks in the gaming industry that I think really bears paying attention to. If you’re familiar with games like Call of Duty, World of Warcraft, Skylanders, or even Candy Crush, then you’re familiar with this company’s work. The stock hit an all-time high at the beginning of October at nearly $85 per share, but has dropped more than 41% since then. I’m not sure the drop is over yet, and in fact I’m still not sure the stock is a great value yet, even with the stock down as big as it is. Its fundamentals, however are solid, and its value proposition is getting more and more interesting practically every day.



    Fundamental and Value Profile

    Activision Blizzard, Inc. is a developer and publisher of interactive entertainment content and services. The Company develops and distributes content and services across various gaming platforms, including video game consoles, personal computers (PC) and mobile devices. Its segments include Activision Publishing, Inc. (Activision), Blizzard Entertainment, Inc. (Blizzard), King Digital Entertainment (King) and Other. Activision is a developer and publisher of interactive software products and content. Blizzard is engaged in developing and publishing of interactive software products and entertainment content, particularly in PC gaming. King is a mobile entertainment company. It is engaged in other businesses, including The Major League Gaming (MLG) business; The Activision Blizzard Studios (Studios) business, and The Activision Blizzard Distribution (Distribution) business. It also develops products spanning other genres, including action/adventure, role-playing and simulation. ATVI’s current market cap is $38.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  declined about -16%, while sales declined about -6.5%. This is a reflection of a decline in ATVI’s total user base, and increasing concentration of its revenue from its top franchises, and the fact that the gaming industry is intensely competitive. The picture did improve in the last quarter, as earnings grew 34%, although revenues continued to decline about -7%. The company’s margin profile, however is a sign of strength, since Net Income increased to 17% of Revenues in the last quarter versus 8.17% over the last year.
    • Free Cash Flow: ATVI’s free cash flow is attractive, at a little over $1.7 billion.
    • Debt to Equity: ATVI has a debt/equity ratio of .25. This number declined significantly over the last quarter, and reflects the company’s conservative approach to debt. Their balance sheet shows more than $3.3 billion in cash and liquid assets in the last quarter versus $2.6 billion in long-term debt.
    • Dividend: ATVI pays an annual dividend of $.34 per share, which isn’t very impressive given the fact that translates to an annual yield that is less than 1%. Keep in mind, however that very few software companies, much less gaming stocks pay a divided at all.
    • 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 ATVI is $13.97, which translates to a Price/Book ratio of 3.57 at the stock’s current price. Their historical average Price/Book ratio is 3.83, which is only about 6.7% below the stock’s current price. Their Price/Cash Flow, ratio, however is about 30% below its historical average; if you use both numbers, you get a long-term price target between $53.50 and nearly $65 per share. Given the speed and depth of the stock’s decline since October, I don’t the worst is over, but that should only serve to improve the stock’s value proposition for picky value investors like me. Given the stock’s current fundamentals, it would start to look very compelling at around $43 per share.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: ATVI’s decline really accelerated at the beginning of November, with the stock gapping down from around $64 per share to its current level around $49. That’s a decline of nearly 30% in just a couple of weeks, and it has pushed the stock not only to a new 52-week low, but also to a price level that it hasn’t seen since April of 2017. The stock’s immediate resistance is between $52.50 and $53, with support right around its recent low in the $47 range.
    • Near-term Keys: The gap that was created overnight when the stock plunged from a bit above $64 to around $55 earlier this year is interesting. If the stock can start to build some positive momentum, a push above $53 (or better, $55) creates a strong opportunity for a short-term bullish trade using call options or just buying the stock outright, with a target price at roughly half the total distance of the gap, which is between $59 and $60 per share. If, however, the stock drops below $47, it could drop all the way to $40 without much difficulty, and so that could provide an interesting shorting opportunity, or a chance to buy put options. The stock’s value proposition is interesting right now, but not quite compelling enough to prompt me to say it’s a great buy right now; but if it does break down, any kind of stabilization between $40 and $43 would be very hard to ignore.


  • 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 →

  • 29 Nov
    What bear market? Transports like KSU are rebounding!

    What bear market? Transports like KSU are rebounding!

    The broad market’s activity since the beginning of October has put a lot of investors on edge. The major market indices all dropped back near to the 52-week lows they set earlier this year and marked a second drop into legitimate correction territory for the year. That has been increasing concern and speculation that the economy and the market could finally be set to turn over and give up the ghost on the longest bull run in recorded history in the United States. More →

  • 28 Nov
    CVS/Aetna deal just got approved – does that make the stock a buy?

    CVS/Aetna deal just got approved – does that make the stock a buy?

    One of the biggest news items of the day yesterday came when CVS Health Corporation (CVS) announced they had received final regulatory approval for their proposed merger with Aetna Inc. (AET). Announced at the end of 2017, this is an intriguing deal, and not just for the massive $77 billion price CVS is paying for the deal that is expected close this week. Combining one of the largest pharmacy companies with another big player in the heath care provider industry offers the promise of a major shift in the way healthcare is offered and delivered in the United States; it certainly seems to put the combined company firmly at the forefront of a change that could leave the rest of both industries scrambling to catch up.

    Earlier this year, pharmacy and healthcare stocks tumbled amid rumors that Amazon (AMZN) was investigating the potential of entering the business as well. That may still happen, and if it does, that should certainly amplify an already highly competitive industry landscape, but a lot of industry reports seem to indicate those fears may be overblown because of the regulatory challenges AMZN would have to hurdle just to make an initial move into the industry. Even if they do, this merger seems like a proactive, forward-looking move by both CVS and AET to set the standard AMZN and every other company is going to have to measure up to.



    CVS is a stock that has performed pretty well this year – especially when you compare it to the performance of the broad market indices. It’s up almost 10% year-to-date, and nearly 13% in the last month alone. It’s fair to say that the biggest piece of that surge has come from enthusiasm about this pending merger; it’s been widely praised by analysts and industry insiders since it was announced. I’ve also seen a lot of analysts labeling the stock as a terrific value, based primarily on forward-looking estimates of what the combined company should be able to do. Some of that makes sense, I suppose; the real problem, of course is that forward-looking estimates are just that, and nothing more. The truth is that integrating two companies is a challenging task – and that is even when the two companies operate within the same market space as usually happens when a merger happens. Merging two companies in related, but completely separate industries is another matter altogether, and so a smooth integration and transition is certainly not a given.

    There is a lot of promise for the future, to be sure, and the fact is that this is a mega-merger between two large cap stocks that are unquestioned leaders in their respective fields. Each company has significant fundamental strengths they bring to the table, and as a combined company, they offer some interesting potential opportunities, such as the expansion of CVS’ existing MinuteClinics to include AET’s clinical capabilities. Those “concept clinics” are expected to start rolling in early 2019, which means investors generally should have almost immediate feedback to work with in trying to analyze the likely success of the merger. What I want to do with today’s post is to consider what folding AET into CVS’s business structure is going to mean from a fundamental point of view, and from there to try to determine if the resulting company is likely to offer a compelling value to work with.



    Fundamental and Value Profile

    CVS Health Corporation, together with its subsidiaries, is an integrated pharmacy healthcare company. The Company provides pharmacy care for the senior community through Omnicare, Inc. (Omnicare) and Omnicare’s long-term care (LTC) operations, which include distribution of pharmaceuticals, related pharmacy consulting and other ancillary services to chronic care facilities and other care settings. It operates through three segments: Pharmacy Services, Retail/LTC and Corporate. The Pharmacy Services Segment provides a range of pharmacy benefit management (PBM) solutions to its clients. As of December 31, 2016, the Retail/LTC Segment included 9,709 retail locations (of which 7,980 were its stores that operated a pharmacy and 1,674 were its pharmacies located within Target Corporation (Target) stores), its online retail pharmacy Websites, CVS.com, Navarro.com and Onofre.com.br, 38 onsite pharmacy stores, its long-term care pharmacy operations and its retail healthcare clinics. CVS has a market cap of $81 billion. Aetna Inc. is a diversified healthcare benefits company. The Company operates through three segments: Health Care, Group Insurance and Large Case Pensions. It offers a range of traditional, voluntary and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans, medical management capabilities, Medicaid healthcare management services, Medicare Advantage and Medicare Supplement plans, workers’ compensation administrative services and health information technology (HIT) products and services. The Health Care segment consists of medical, pharmacy benefit management services, dental, behavioral health and vision plans offered on both an Insured basis and an employer-funded basis, and emerging businesses products and services. The Group Insurance segment includes group life insurance and group disability products. Its products are offered on an Insured basis. AET has a market cap of about $69.4 billion

    • Earnings and Sales Growth: Over the last twelve months, earnings for CVS increased by about 15%, while sales were mostly flat, increasing about 2%. For AET, earnings increased about 20% in the last year. CVS operates with extremely narrow operating margins, as Net Income was only 1.6% of Revenues for the last twelve months and 2.9% in the last quarter. AET has a wider margin profile, with Net Income that was 5.9% over the last year and 6.4% in the most recent quarter.
    • Free Cash Flow: CVS’s free cash flow is healthy, at about $4.3 billion, while AET’s is more modest, and about $550 million. Both companies have good liquidity, with cash and liquids assets for CVS that totaled $41.6 billion in the most recent quarter, and $9.5 billion for AET over the same period.
    • Debt to Equity: CVS has a debt/equity ratio of 1.66. This is higher than I usually prefer to see, but is primarily attributable to the massive increase in debt the company preemptively took on at the beginning of the year when the merger was first announced. Total long-term debt is $60.7 billion for CVS. AET has $7.7 billion in long-term debt, which is almost $2 billion less than their cash. CVS has also laid out an aggressive debt reduction program that they expect to lower the total debt the combined company will be working with to much more conservative levels early in 2020.
    • Dividend: CVS and AET each pay an annual dividend of $2.00 per share. Whether that means that shareholders in the combined company will get to enjoy receiving a $4 annual dividend remains to be seen; my expectation is that the dividend will remain the same on a per-share basis in order to give the combined company more flexibility in managing their debt service.
    • 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 CVS is $35.97 per share. At CVS’s current price, that translates to a Price/Book ratio of 2.21. The stock’s historical average is 2.48, which offers about a 12% upside from the stock’s current price. There is a more compelling argument to be made for the stock on a Price/Cash Flow basis, since the stock is currently trading more than 35% below that historical average. AET, on the other hand, is overvalued based on both its Price/Book and Price/Cash Flow ratios by anywhere from 5% (slightly overvalued) to 50% (very overvalued). Based strictly off of existing, historical information, I expect the combined company to initially be overvalued.



    Technical Profile

    Here’s a look at CVS’ latest technical chart.

     

    • Current Price Action/Trends and Pivots: CVS followed the broad market quite a bit lower in October, but rallied back above its early October high before dropping back a bit until late last week. The market’s enthusiasm for the merger is giving the stock a nice boost right now. Resistance is right at $80, which is almost where the stock is sitting right now. Immediate support is around $69. A push above $80, to about $82 (or whatever price its recent high translates to once the merger is completed), would mark a continuation of the stock’s upward trend since August, while a drop below $74 would mark a reversal of that trend, with a break below $69 representing an indication a new bearish trend could see an extended run. AET, not shown here, has a completely different technical picture, since the stock has been following a very impressive upward trend since February of 2016 and has more than doubled in price over that period.
    • Near-term Keys: CVS is a stock that by most measurements would be considered undervalued, while AET is overvalued. It seems apparent that CVS is consciously paying a big premium for this deal. The potential to transform the healthcare industry is a compelling draw, and it’s safe to say that both companies believe they can thrive in that effort by doing it together. Does that make the stock a bargain right now? I think a lot of investors are going to be jumping onto the stock with exactly that expectation, so don’t be surprised if you see the combined company experience a pretty nice rally in the short-term, post-merger period. Over the next few months, I’ll be watching the financial results pretty closely, to see if they seem to line up with the story both companies have been presenting for the last year. No matter which way it goes, this is a deal that could mark a big turning point for both industries.


  • 27 Nov
    KR is a stock that you shouldn’t ignore

    KR is a stock that you shouldn’t ignore

    With market uncertainty increasing, it’s natural to wonder what kind of stocks make the most sense to pay attention to. How do you keep your eyes out for decent opportunities to make your money working for you when the market looks like it could be at a tipping point and broad market is increasing? I think a good approach is to look for conservative opportunities that offer a lower amount of risk than trying to find the next high flyer. That means focusing your attention on segments of the market that should see stable revenue flows, with relatively consistent profit levels even if the economy does in fact reverse and turn bearish.

    One of the areas I really like to work with in these kinds of conditions is Consumer Staples. Food stocks make a lot of sense to me, because even when the economy struggles, consumers are still going to need to put food on their tables. Grocery stores like The Kroger Co. (KR) offer a similar kind of profile.

    KR is an interesting company; they tend to get marginalized a little bit because of competitive pressure from bigger competitors like Walmart (WMT), Target Stores (TGT) and even Amazon (AMZN), but this is a company that has shown a consistent ability over the years to survive and successfully transform itself to stay relevant and maintain its presence. They also don’t mind taking calculated risks by setting their sights on new business streams that they think offer a good opportunity to expand their business. An interesting example of this is the company’s recent introduction of Bromley’s for Men, a line of men’s grooming products, including razors, shaving cream, lotion and face cleansers. It’s a clear play to take a page from stocks that help to stock the store’s shelves, like Proctor & Gamble’s (PG) Gillette brand as well as the shaving clubs that have been seeing an increase in popularity.



    Fundamental and Value Profile

    The Kroger Co. (KR) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a market cap of $23.6 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by about 5%, while sales were mostly flat, increasing about 1%. In the last quarter, earnings and sales both declined, a fact that has been one of the biggest catalysts for the market to push the stock down off of its recent highs. Management attributed most of that decline to costly store redesign efforts the company has been engaged in for a large percentage of its stores nationwide, but that has been largely completed and that management expects will translate to better bottom-line improvement in the quarters ahead. The company operates with narrow margins, as Net Income was about 3% of Revenues for the last twelve months. This number dropped in the most recent quarter to 1.8%.
    • Free Cash Flow: KR’s free cash flow is healthy, at about $685 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.3 billion in cash and liquid assets, a number that declined from the last quarter but still remains healthy.
    • Debt to Equity: KR has a debt/equity ratio of 1.65. This is higher than I usually prefer to see, but isn’t unusual for Food Retailing stocks. The company’s balance sheet indicates that operating profits are more than adequate to repay their debt. It is also noteworthy that this number dropped in the last quarter from 1.74.
    • Dividend: KR pays an annual dividend of $.56 per share, which translates to a yield of about 1.86% at the stock’s current price. This is roughly inline with the industry average, but a bit below the S&P 500 average of 2.0%.
    • 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 KR is $9.21 per share. At KR’s current price, that translates to a Price/Book ratio of 3.22 at the stock’s current price. The industry average is 3.2, and the stock’s historical average is 5.06. A rally to par with the historical average would put the stock above $46 per share. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: After rebounding from a pivot low in early October at around $27, the stock peaked early this month at around $32 before dropping back to its current range. It looks like it could be hitting another pivot low right now, with a bounce right off of support a little below $30. A push above $33 per share would mark a break above the range the stock has held since September, and could signal a longer upward trend could be building. The stock’s strongest support right now is around $27; a drop below that point could see the stock drop back into the low $20 range it saw earlier in the year.
    • Near-term Keys: If you don’t mind being aggressive, and little bit speculative, there could be an opportunity to buy the stock or work with call options right now, with an eye on the $33 range as a near-term profit target. If the stock breaks down below its immediate support at $29, you could also consider shorting the stock or buying put options with a target low around $27. I think the best opportunity, however lies in the long-term value potential the stock offers, with a pretty conservative profile that I think makes it more conservative, defensive-oriented stock to work with right now.


  • 26 Nov
    HPE could be an interesting tech play for value investors

    HPE could be an interesting tech play for value investors

    Market volatility since the beginning of October has pushed the entire market down near to its 52-week low, which was last seen in April of this year. That broad-based move, which puts the S&P 500 Index back into correction territory, has put a number of sectors near or into their own bear market territory. Tech stock have been some of the biggest headline generators over the last several weeks, and by some measurements could be considered one of the most bearish sectors in the market right now. If you’re focusing on short-term trading strategies, that means that looking for bullish trades on tech stocks is probably a losing game; but if you’re willing to work with a long-term perspective, and to look for stocks that could offer an interesting value proposition, this is a sector whose current bearish momentum could also represent a smart opportunity.

    Some of the questions about the tech sector right now are significant, and I don’t think they are likely to be answered quickly. Trade tensions between the U.S. and China have kept pressure on the sector all year long, and there still doesn’t seem to an end in sight to the pall that has cast on any company with any kind of hint of exposure to that part of the world. Pricing pressures in storage technology – specifically memory and drive storage – attributed to oversupply as well as increasing competition in the segment – are another concern that seems to be having something of a ripple effect on companies that compete in the consumer and enterprise storage space. In a broader sense, some disappointing recent numbers about the latest iPhone release are leading a lot of investors to wonder if that business is recent the limits of its growth potential. Add to those sector-specific questions additional uncertainty about whether the economy’s current health is finally reaching its nadir and could start to taper off, or whether increasing interest rates are finally going to bring the longest period of economic expansion in memory to an end, and it isn’t all that surprising to see the market, and the tech sector specifically, threatening to turn into a more serious downward trend.



    What do you do as an investor to keep your money working for you when the market looks like it could be getting riskier? Some folks prefer to take a completely defensive approach, meaning that they’ll take advantage of every opportunity to close out the long positions they have, and stop taking on new ones, until they see indications that the broad market is starting to stabilize, or even beginning to pick up new bullish momentum. The advantage that approach has is that if you’re right, and the market’s current correction is going to turn into a much longer downward trend, or out right bear market, sitting in cash means that you aren’t going to lose money, while those who do decide to keep their money in the market are much more likely to see the stocks they are holding drop well below the prices they bought them at. Depending on where they got them, a truly extended bear market could mean those stocks could take years to recover back to the levels they were at they got in.

    The disadvantage, however is that sitting in cash means that you have immediately limited the possibility of future growth – at least for as long as you stay in cash. Consider that most savings accounts, CD’s or money markets are offering yields below 3% right now, and that means that the longer you sit in cash, the more you’re really allowing your buying to deteriorate. Keeping your money in the market means that you’re still giving your money a chance to work for you – because it isn’t a given that every stock in the market is going to keep going down, even when the broad is market is overwhelmingly bearish. There are always pockets of opportunity to be found, in every industry and sector of the market.

    When it comes to technology, I like the idea of looking for value in companies whose business model might not put them on the cutting edge of innovation, but does keep them in the segments that are going to keep everything else going. Enterprise technology refers to hardware, software, and technology services and solutions that drive business, and even if the broad economy falters, the truth is that technology’s place in the world’s economic fabric isn’t going away. Hewlett Packard Enterprise Co (HPE) is an example of a company that serves this specific segment, and that I think represents a smart tech play, even if the economy and the broad market turns bearish. The company has an overall solid fundamental profile, and even more importantly, a value proposition that, even with a conservative long-term price target, offers a nice opportunity right now.



    Fundamental and Value Profile

    Hewlett Packard Enterprise Company is a provider of technology solutions. The Company’s segments include: Enterprise Group, Software, Financial Services and Corporate Investments. The Enterprise Group segment provides its customers with the technology infrastructure they need to optimize traditional information technology (IT). The Software segment allows its customers to automate IT operations to simplify, accelerate and secure business prHPEesses and drives the analytics that turn raw data into actionable knowledge. The Financial Services segment enables flexible IT consumption models, financial architectures and customized investment solutions for its customers. The Corporate Investments segment includes Hewlett Packard Labs and certain business incubation projects, among others. HPE has a current market cap of $21.4 billion.

    • Earnings and Sales Growth: Over the past year, earnings increased almost 42%, while sales declined about 5.5%. In the last quarter, earnings increased about 2.9.5%, while sales grew by 4%. The company operates with a margin profile that declined from 10.4% in the past twelve months to 5.8% over the last quarter.
    • Free Cash Flow: HPE’s Free Cash Flow is modest, at about $440 million. On a Free Cash Flow Yield basis, that translates to a mostly unremarkable 2.05%.
    • Debt to Equity: HPE has a debt/equity ratio of .42, which is a conservative number. Their balance sheet shows $5.3 billion in cash against $9.9 billion in long-term debt. Their balance sheet indicates their operating profits are adequate to service their debt, with healthy liquidity as well.
    • Dividend: HPE pays a dividend of $.45 per share, which translates to an annual yield of about 3.09% 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 HPE is $15.94 per share. At HPE’s current price, that translates to a Price/Book Ratio of .91. The stock has actually only been trading publicly for about three years, which means that historical average ratios are less reliable; in this case I like to use the industry average as a reference point. The industry average Price/Book ratio is 2.7 and puts the top end of the stock’s long-term price target at around $43 per share. I think that is an extremely overoptimistic target, given that the stock’s all-time high is only at around $19 per share; however a better measurement comes using the stock’s Price/Cash flow ratio, which is currently trading about 28.5% below the industry average Price/Cash flow ratio. That translates to a more conservative, but still attractive target prices at around $18.50 per share.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: HPE’s downward slide since January is easy to see, with most of the decline seen from its March peak at $19.50 to its July low, which the stock is very near to right now. If the stock breaks below its current support level, which is right around $14.50, it should find its next support between $12.50 and $13 per share. The stock would need to break above $16, to about $16.50, to confirm a reversal of its longer downward trend.
    • Near-term Keys: If you don’t mind being aggressive, and little bit speculative, there could be an opportunity to buy the stock or work with call options if it can bounce of support around $14.50 and push higher. In that case, be ready to take profits quickly between $15.50 and $16 per share. A bearish trade using put options or shorting the stock isn’t really a very practical trade unless it does actually break below its current support to around $14. I believe the best opportunity lies in the stock’s long-term value proposition, but given the overall bearish sentiment in the broad market and the sector, I think the stock could keep dropping, which just means that its value proposition is likely be even more attractive the longer you wait for signs the stock is actually about to reverse its downward trend.


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