• 18 Sep
    MU could be the best bargain in the stock market right now – but be careful!

    MU could be the best bargain in the stock market right now – but be careful!

    Over the last month or so, market fears and uncertainty have centered primarily around global trade. In July and August, one of the most affected pockets of the economy was the tech sector, with particular bearishness bearing down on semiconductor stocks. As measured by the iShares Semiconductor ETF (SOXX), that industry is down about 5.5% since peaking in early June. More →

  • 17 Sep
    Trade fears mean BWA is STILL a screaming buy

    Trade fears mean BWA is STILL a screaming buy

    The Trump administration’s aggressive trade policies with its partners have had global markets on edge for months. And even as headway is being made with Mexico, and pressure is intensifying on Canada to sign the agreement to redo NAFTA by the end of the month, and talks continue with the European Union, concerns and worries persist in particular over how quickly any kind of deal can or will be made with China, America’s largest trade partner. Those concerns have kept pressure on global markets, which also means that stocks in industries that are the most directly impacted by tariffs have experienced the greatest volatility. Stocks in the auto industry, or related to it, for example are among the ones that have seen the biggest swings in price.

    BorgWarner Inc. (BWA) is a good example. While the stock is down about 13.3% year-to-date, it’s actually down a little over 28% since reaching an all-time high in mid-January. I first wrote about this stock a month ago, with the stock at practically the same price it is at right now. That is one of the things that makes the stock interesting right now; while trade war fears have persisted since early spring, the stock has stabilized since July in the mid-$40 range. That has opened an interesting technical opportunity on a fundamentally very solid stock, since the longer the stabilization range holds, the more likely it is to break out of it and rally back to the upside.

    BWA’s fundamental profile is better than many of its brethren in the Auto Components industry, with good cash flow, conservative debt levels and operating margins that have actually improved over the last year despite increasing price pressures. Those pressures include exposure to foreign trade risk, but that is an element that up to this point has yet to be actually be felt. It is true that the stock isn’t immune to the potential long-term effects of trade conflict, but it is also true that most of those effects for now are inferred. If Canada yields as many seem to expect to pressure from the U.S. and from Mexico to join their agreement, look for the market to respond positively, with momentum swinging in favor of the Trump administration versus the E.U. and China. Either way, at its current prices, BWA offers an incredibly attractive value proposition right now.



    Fundamental and Value Profile

    BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA’s current market cap is $9.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 23% while revenues posted an increase of nearly 14%. In the last quarter, the increase in earnings was more modest at a little over 7%, while sales declined by 3.24%. The company operates with a narrow margin profile, with Net Income running at only about 5% of Revenues for the last twelve months; however this measurement nearly doubled to 10% in the last quarter.
    • Free Cash Flow: BWA’s free cash flow is healthy, at a more than $515 million. While the number declined since the beginning of the year, it has increased since late 2015 from only about $150 million.
    • Debt to Equity: BWA has a debt/equity ratio of .52. This number reflects the company’s manageable debt levels. The company’s balance sheet indicates operating profits are sufficient to service the debt they have.
    • Dividend: BWA pays an annual dividend of $.68 per share, which translates to an annual yield of about 1.5% 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 BWA is $19.41 per share and translates to a Price/Book ratio of 2.31 at the stock’s current price. Their historical average Price/Book ratio is 2.96. That suggests the stock is trading right now at a discount of a little over 28%, and that puts the stock’s long-term target above $57 per share. Additionally, the stock is currently trading more than 78% below its historical Price/Cash Flow ratio. The stock’s all-time high was reached in mid-January of this year at around $58, which means projecting a 75% increase in the stock may be speculative, especially under current market conditions; however it also suggests there is a good argument for the stock to retest its highs, especially if the broader market can maintain its long-term upward bullish strength.



    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 from mid-April to its bottom in July of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock found major support, and the end of its downward trend around $42 in early July, and has used that price area as a pivot low support point on multiple occasions since then. The top end of its range since then is around $46 per share, and the stock would need to break above that level to stage a legitimate trend reversal, with incremental resistance points around $48 and $50.
    • Near-term Keys: If you’re a short-term trader looking for a good opportunity with this stock, a good signal to buy the stock or to work with call options would come if the stock breaks above $46 per share. The stock’s current support at around $42 per share also marks an important signal point for a potential bearish set up, as a break below that point would be a good time to consider shorting the stock or working with put options. If you’re willing to work with a long-term time horizon, and you don’t mind the potential volatility that could come with continued market uncertainty and trade concerns, its current price also offers an excellent starting point for a long-term, value-based opportunity.


  • 14 Sep
    Jim Cramer is calling BP “the cheapest oil major” – but these two U.S. stocks look a LOT better

    Jim Cramer is calling BP “the cheapest oil major” – but these two U.S. stocks look a LOT better

    To some people, Mad Money host Jim Cramer is an investing guru. And he certainly draws a fair amount of attention; not only does he host his own show on CNBC every weeknight, but he is also a regular on the station during the early pre-market and opening hours of each trading day, holding forth on his view of current events and their effect on the market. More →

  • 13 Sep
    SKX: 38% decline since April just makes the stock more interesting

    SKX: 38% decline since April just makes the stock more interesting

    If you pay much attention to market news, most of the focus revolves around the segments of the economy that are performing the best right now. It’s a classic “follow the herd” mentality that can actually work pretty when the economy is healthy and growing, but it also has its drawbacks. More →

  • 12 Sep
    Is MAN a good value in the current economy?

    Is MAN a good value in the current economy?

    Over the last several years, one of the biggest benchmarks the Fed has used to evaluate the need to raise, lower or maintain their interest rate policy has been the employment rate. Every month, the market seems to hold its breath as a new set of unemployment and salary data is made available and everybody gets to wonder what the information means for the current economic climate and, therefore for interest rates. More →

  • 11 Sep
    Why you shouldn’t fall for the value trap that is TEX

    Why you shouldn’t fall for the value trap that is TEX

    A couple of weeks ago, I wrote about Oshkosh Corporation (OSK), a mid-cap stock in the Heavy Machinery industry that is trading at a steep discount right now, and that I think looks like a pretty interesting value-based opportunity. The entire industry is pretty depressed right now, and you don’t have to look much further than the biggest names in the industry More →

  • 10 Sep
    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Want to be a smart value investor? Pay attention to great stocks at deep discounts – like WDC

    Since mid-July, I’ve written twice previously about Western Digital Corporation (WDC). The first time I wrote about them, the stock was priced around $75 per share, and my analysis showed that was a nice price for a good company that had hit an all-time high at around $107 just a few months before. On August 9, I wrote about them again, because the stock had dropped even lower, to around $66 per share, but now also had its most recent earnings report to add to the mix. At a price that was about 12% lower than just a few weeks before, and with a terrific fundamental profile, what had been a “nice’ price for the stock was now looking like a “great” price. Fast forward a month, and as of this writing the stock is now below $58 per share. The fundamentals haven’t changed in four weeks, but in the last week or so the stock picked up some more negative momentum and is pushing to even deeper lows.

    So what’s been driving the latest plunge, which has driven the stock down a little over 23% since my first post in July? Sometimes, the stock market makes sense – or at least, you can tie what a stock is doing at a given time to specific news, or to something about the underlying company that has some semblance of logic to it. Often, though, it’s downright maddening. I’ll admit that when I first saw WDC drop below $70 I struggled to tie it to anything concrete. I’ve kept digging, and while I think I’ve found a couple of threads to tie the decline to, the logic behind one of them makes me shake my head.



    Shortly after my July post, WDC published its latest quarterly earnings report. The numbers were good across the board – every fundamental measurement I use in my analysis remained very healthy or improved, including the company’s Book Value. It was right after that report, however that the stock started to drop. At the same time, WDC’s only real competitor in the HDD space, Seagate Technology Plc (STX) released their own earnings report. STX’s report reflected a reality that seems to be scaring investors about either company, because sales of HDD storage continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed.

    The picture for NAND and SSD storage – memory that is built on solid-state technology, and what has increasingly become the preferred storage type in the consumer market, including for personal computers of just about any type, tablets, and pretty much any type of mobile device – also appears murky, and that is another element that is working against the stock’s price right now. Multiple recent reports from industry analysts indicate that pricing for NAND memory is dropping amid concerns about oversupply as well as increasing competition in the space. That puts pressure on the second tier of WDC’s business strategy; the first tier continues to provide HDD storage to the enterprise and cloud storage market (where the larger capacities available from traditional drives is needed), while the second included the 2016 acquisition of SanDisk to put them at the front of pack in the consumer-driven NAND and SSD market.



    The truth, of course is that with more companies like Micron Technology (MU), Intel Corporation (INTC) and others making forays into the space, it isn’t a given WDC will maintain their leadership position in this segment. Intensifying competition, along with high supply clearly is also playing a role right now in the stock’s decline and is a major centerpiece of every argument I’m finding against paying attention to this space right now. That is actually one of the biggest reasons that i continue to think the opportunity with the stock is even better today than it was a month ago.

    Competition in any business segment is a normal thing, and while that increases the pressure on any company, a good management team doesn’t shy away from it. I really like WDC’s strategy, and I think that in the long run they’re doing the right things to keep their business growing. I’m even willing to concede that pricing pressures in the NAND and SSD space could impact the company’s earnings in the near term; but I think the market is over-selling that risk to the point that the stock’s incredibly deep discount now – more than 46% below its March high – is making the stock an undeniable bargain. Even the analysts that are writing scary predictions right now are putting the stock’s long-term target price at around $75, which is about 30% above the stock’s current price, and not too far from my own target, as you’ll see below.



    Fundamental and Value Profile

    Western Digital Corporation (WDC) is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company develops and manufactures a portion of the recording heads and magnetic media used in its hard drive products. WDC’s current market cap is $16.8 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 29% while revenue growth was modest, posting an increase of almost 6%. WDC operates with a narrow margin profile of about 1%. By comparison, STX’s margins are around 10%. I believe the difference is a reflection of the company’s differing approach to growth; STX focuses almost exclusively on the higher margin aspect of increasing enterprise demand, while WDC takes a two-tiered approach by meeting enterprise demand for HDD drives while also pushing hard on innovation and evolution with NAND and SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at almost $3.4 billion. That translates to a free cash flow yield of almost 17%, which is much higher than I would normally expect given the company’s narrow operating margins.
    • Debt to Equity: WDC has a debt/equity ratio of .95. That number declined from a little above 1 two quarters ago, as long-term debt dropped by more than $1 billion. Their balance sheet indicates their operating profits are more than adequate to repay their debt, and with almost $5 billion in cash and liquid reserves, the company has excellent financial flexibility, which they plan to use to pay down debt, repurchase their shares and consider other strategic acquisitions.
    • Dividend: WDC pays an annual dividend of $2.00 per share, which translates to a yield of almost 3.5% at the stock’s current price. That fat dividend – quite a bit higher than the S&P 500 average, which is a little below 2% – is a good reason to think seriously about buying the stock and waiting out any near-term price volatility you might have to endure. It’s free money you don’t have to do anything for except to hold your shares.
    • 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 WDC is $38.53 and translates to a Price/Book ratio of 1.45 at the stock’s current price. Their historical average Price/Book ratio is 2.12. That suggest the stock is trading right now at a discount of a little over 31%, which is very attractive, since it puts the stock’s long-term target price at nearly $84 per share.



    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 intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock broke below strong support from repeated low pivots since late last year at $75, which has really driven the stock’s bearish momentum. The Fibonacci analysis shown on the chart above makes it hard to see where the stock’s next support level is likely to be. The stock is currently plumbing lows not seen since late 2016, where previous pivots put the most likely support in the $53 range.
    • Near-term Keys: As you can see, the stock is already offering a massively discounted price relative to where I think it’s long-term potential lies. The truth is that if you went long on this stock in late July, you’re probably trying to decide what to do to manage the position now. I think there is more than adequate argument to hold on and ride out the stock’s current downward trend; but if you want to limit your risk, using a stop loss 25% below your purchase price would be a smart, conservative approach. If you’re thinking about trying to short the stock or start working with put options to take advantage of downside, the best signal for that kind of trade would come if the stock manages to break prior pivot support at around $53. That could see the stock drive even lower and into the mid-$40 range.


  • 07 Sep
    Why SLCA’s 42% drop since May is a GOOD thing

    Why SLCA’s 42% drop since May is a GOOD thing

    Over the last four years, one of the most interesting segments of the economy to pay attention to has been the energy sector. That doesn’t mean following the biggest players in the the oil industry, although there have been some really interesting investing opportunities among those companies over the last couple of years. It also means keeping track of “energy-related” stocks. Like the smart entrepreneurs during the California Gold Rush More →

  • 06 Sep
    U.S. – Canada trade fears have created a great value opportunity for this Detroit supplier

    U.S. – Canada trade fears have created a great value opportunity for this Detroit supplier

    Last week the Trump administration announced it had made a deal with Mexico to rework the two countries’ two-and-a-half decades long trade agreement. There is a third party in that agreement, of course, since NAFTA originally included the U.S., Mexico and Canada. The move has clearly put more pressure on the Canadian government to compromise, although to this point it doesn’t appear much more progress on that front has been made.

    Tensions between the U.S. and Canada have revolved primarily around tariffs on autos, although other goods have been involved as well. Concern around trade issues between the two countries have weighed on Canadian stocks that rely heavily on partnerships with U.S. business. Magna International (MGA) is a good example; since late May, when the stock hit an all-time high at around $67.50, the stock has lost about 25% of its value. Trade issues between the U.S. and Canada aren’t over, and that means that momentum for stocks like MGA could continue to be mostly bearish; at the very least, investors who are interested in this stock should expect to see plenty of volatility in the weeks and months ahead as the market decides what direction the stock should follow.



    Over the last month alone, the stock has dropped about 10%, after the company missed estimates in its latest earnings report. That pushed the stock into an even more decidedly bearish near-term profile, as the stock crossed below its 200-day moving average line. This moving average acts as an important visual indicator of a stock’s long-term trend for most technicians, and so a move below that line is usually taken as a clear sign the stock’s current trend is going to keep moving down. Over the last couple of weeks, however, the stock has shown some interesting resilience, finding support around $52 per share. Despite the market’s reaction to their latest report, the truth is that the earnings picture is actually pretty good for MGA, and the overall fundamentals for this company remain quite good. 

    The company’s earnings report did include tariffs as a risk element in the third and fourth quarters of the year, and that is probably another big reason the stock has continued to drop. I think it’s worth pointing out, however that the U.S. – Mexico announcement took the market by surprise and wasn’t expected; to me that means that for all the posturing that has gone on (and continues) between the countries involved, it’s really all about what happens behind closed doors. I think Canada it’s ultimately going to be in the best interest of both the U.S. and Canada to bring all three American trading partners back together again, and so most of the bearish sentiment around stocks like MGA is really just creating good opportunities to pick up some great companies at very nice valuation levels.



    Fundamental and Value Profile

    Magna International Inc. (Magna) is a global automotive supplier. The Company’s segments are North America, Europe, Asia, Rest of World, and Corporate and Other. The Company’s product capabilities include producing body, chassis, exterior, seating, powertrain, electronic, active driver assistance, vision, closure, and roof systems and modules, as well as vehicle engineering and contract manufacturing. The Company has over 320 manufacturing operations and approximately 100 product development, engineering and sales centers in over 30 countries. It provides a range of body, chassis and engineering solutions to its original equipment manufacturer (OEM) customers. It has capabilities in powertrain design, development, testing and manufacturing. It offers bumper fascia systems, exterior trim and modular systems. It offers exterior and interior mirror systems. It offers sealing, trim, engineered glass and module systems. It offers softtops, retractable hardtops, modular tops and hardtops. MGA has a current market cap of about $18.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew almost 13%, while Revenues grew a little over 6%. Growing earnings faster than sales is hard to do, and generally isn’t sustainable in the long term; however it is also a positive mark of management’s ability to maximize a company’s business operations. In the last quarter, the picture turned negative, with earnings decreasing a little over 9% and sales declining almost 5%. That could be a first, early indication of impact from tariffs on costs, both for MGA as well as for its customers.
    • Free Cash Flow: MGA’s free cash flow is healthy, at a little more than $1.9 billion. This number has been somewhat cyclic from one quarter to the next, but has shown a general, upward stair-step pattern of growth going back to the last quarter of 2016.
    • Dividend: MGA pays an annual dividend of $1.32 per share, which translate to an annual yield of 2.48% at the stock’s current price. 
    • Return on Equity/Return on Assets: These numbers are very strong. ROE is 19.72 and ROA is 8.94.
    • 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 MGA is $33.97 and translates to a Price/Book ratio of 1.56 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.94, suggesting the stock is nicely undervalued by about 24%; at par with its average, the stock should be trading at about $66 per share. Working with $66 as a long-term target is even more justified by looking at the stock Price/Cash Flow ratio, which is currently 30% below its historical average. That would put the stock in range to test its all-time highs and in position to start making new ones.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: After following a nice upward trend until May, the stock peaked at around $67.50 before dropping back its current level. The gap you see in early August came in conjunction with the company’s last earnings report, and in fact that gap is providing resistance right now against any further movement upward for the stock. I already alluded to its 200-day moving average (not shown); the stock is about $5 per share below that line, and would need to break above it to stage any kind of new upward trend. A drop below $52 per share would mark a break below the stock’s long-term support level and could provide bearish momentum for a continued decline to as low as $45 in fairly short order.
    • Near-term Keys: The stock’s most current resistance is at around $56, from a pivot high just about a week ago; if the stock can break that level, there could be a good short-term opportunity to buy the stock or work with call options. If you like the stock’s value potential right now, and don’t mind dealing with what I think will be quite a bit of volatility for the time being, this could be a great time to go ahead and take a position with a long-term time frame in mind. If you prefer to work with the bearish side of the market right now, wait to see if the stock drops below $52; if it does, consider shorting the stock or working with put options.


  • 05 Sep
    SMG: Agriculture, or Marijuana value play?

    SMG: Agriculture, or Marijuana value play?

    When most folks start looking for opportunities to invest their hard-earned and saved dollars, they usually gravitate to the stocks that they hear about the most. It makes sense – most of us have a limited amount of time to pay attention to the market, and so we tend rely on the brief snippets of information we can glean by catching a few minutes of market news on CNBC or Bloomberg or by surfing market headlines on the Web. That usually means that if an industry or segment of the economy isn’t getting a lot of attention from the talking heads and “experts” that dominate market media, it isn’t going to catch even the slightest whiff from the average investor.

    Agriculture stocks are one of those industries that everybody seems to understand plays an important role in the ebb and flow of the economy, but that nobody really cares to pay a lot of attention to. Let’s face it: these are companies that just don’t have the same kind of buzz or cool, cutting-edge appeal of the tech industry or the wide, volatile swings of other sectors like energy, biotech, or pharmaceuticals.



    Yesterday I saw an interesting report that indicated the average age of farmers in the United States is advancing in troubling ways. With an average age of 58.3 years and climbing, the implication is that as the latest generation of farmers retire or pass away, the remaining workforce isn’t going to be large enough to serve the massive need associated with being able to feed and clothe the world. That isn’t just America’s responsibility, of course, but the same study indicates that the trend of advancing farmer age is consistent in other developed countries around the world.

    The interesting side note to this trend as an investor is that even if the worst-case scenario doesn’t emerge, pressure on the agriculture industry to keep up with demand should provide some good long-term opportunities for the companies that can help the entire sector stage a comeback. While agriculture has been “out of favor” with investors in general for decades, this could be on of the best opportunities to find really great value in the years ahead.



    Another trend that has been gaining a lot of traction throughout the world, and that is almost sure to have an impact on the farming sector is cannabis legalization. No matter whether you’re talking about the legalization of cannabis for recreational or medicinal purposes, or both, the odds are excellent that some of the really terrific growth opportunities will come from stocks that focus a significant portion of their business on cannabis. Scotts Miracle-Gro Company (SMG) may not be exclusively focused on cannabis – they are more generally known as the company that makes the fertilizer you probably buy at Lowe’s or Home Depot –  but through their Hawthorne Gardening Company, they provide products to help artisanal farmers grow cannabis. It’s a large enough portion of their current operations that a lot of the attention the stock has been drawing in the market lately has come from discussions about marijuana.

    Depending on the measurement you use, the stock could be quite undervalued right now. The fact is that the stock began a strong downward trend in January of this year, falling from a peak around $110 to its current level around $75. That’s a decline of 46% over the last eight months. The stock has some fundamental elements; some that suggest a significant amount of strength in their business and management approach, and others that raise some red flags. To some extent, that means that value for this company is in the eye of the beholder. I’ll cover the numbers that I think are the most interesting and useful, and outline the parameters around the stock’s price action that I think could offer investors a good reward: risk opportunity.



    Fundamental and Value Profile

    The Scotts Miracle-Gro Company (Scotts Miracle-Gro) is a manufacturer and marketer of branded consumer lawn and garden products. The Company’s segments include Global Consumer. In North America, its brands include Scotts and Turf Builder lawn and grass seed products; Miracle-Gro, Nature’s Care, Scotts, LiquaFeed and Osmocote gardening and landscape products; and Ortho, Roundup, Home Defense and Tomcat branded insect control, weed control and rodent control products. In the United Kingdom, its brands include Miracle-Gro plant fertilizers; Roundup, Weedol and Pathclear herbicides; EverGreen lawn fertilizers, and Levington gardening and landscape products. SMG has a current market cap of about $87.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings were nearly flat, growing only 1.5%, while sales decreased almost 8%. The picture isn’t better in the last quarter, with earnings falling a little over 7% while sales declined almost 2%. Much of the decline in sales appears to have been attributed to revenues in the Hawthorne division that missed management’s targets and was blamed primarily on cannabis regulatory delays in California. As more states adopt more liberal regulations around cannabis production and sales, the industry’s reliance on California as a primary market is expected to decrease. More interesting is the fact that despite the earnings and sales declines, the company managed to improve their operating profile in the last quarter, as Net Income as a percentage of Revenues increased, from 6.7% over the last twelve months to 8.3% in the most recent quarter.
    • Free Cash Flow: SLB’s free cash flow is adequate, at a little more than $201 million. This number declined in the last quarter from about $300 million.
    • Return on Equity/Return on Assets: These numbers are very strong. ROE is 43.37 and ROA is 7.45.
    • 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 SMG is $9.58 and translates to a Price/Book ratio of 7.79 at the stock’s current price. The stock’s historical average Price/Book ratio is 7.2, suggesting the stock is overvalued by about 7.5%; at par with its average, the stock should be trading at about $69 per share. To provide a compelling bargain relative to its historical Price/Book levels, the stock would need to drop to around $55 per share. That doesn’t sound favorable from a value standpoint right now, of course, but an interesting counterpoint comes from analyzing the stock’s Price/Cash Flow ratio, which is 27% below its historical average. That gives the stock a long-term target price at around $95 per share – a level that was last seen in late January.



    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 from January of this year until now; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. In mid-August, the stock found trend support at around $72.50 per share and has start to rally a bit from that point. The size of the stock’s decline over the last eight months means that the trend’s retracement levels, which I usually like to use to provide a strong indication of trend reversal points to pay attention to, are further from the stock’s current price than normal; after all, the $87 price level, which where we can see the 38.2% retracement level, is about 16% above the stock’s current price. If the stock breaks that level, I would expect to see the stock push high enough to test its high at around $110 per share.
    • Near-term Keys: A break above $87 would mark a pretty clear indication of a bullish trend reversal; but I’m not sure that a move to that point is necessary in this case to provide a good, high-probability opportunity for a bullish investor. The stock’s intermediate trend line, as represented by a 50-day moving average (not shown) is around $80, and that usually marks an important resistance level during a downward trend. A break above that, to about $81 with strong buying volume should give the stock good bullish momentum to push to $87, and so could be a nice early sign to work with. Even a break below the trend’s support low at around $72 per share wouldn’t be a bad thing; given the prices I described in my Price/Book ratio analysis, a drop to $69 could be an interesting point to take a value-based position if the stock shows signs of stabilization at that level. A drop below $69 should be taken as a sign the stock could drop as low as the $55 price level I also alluded to; that could act as a signal to short the stock or to work with put options for the time being, with an eye to buying the stock at a deeper discount in the $55 price area.


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