• 04 Sep
    How close is SLB to being a great value play?

    How close is SLB to being a great value play?

    After the market for West Texas Light crude peaked in July 2014 above $105 per barrel, prices plunged to a low around $24 per barrel by the beginning of 2016. That decline set off an even more extended bear market for related stocks like Halliburton Company (HAL) and Schlumberger N.V. (SLB), the world’s two largest oil services companies. According to SLB’s CEO, the industry’s inability to recover even as oil prices stabilized and rebounded to their current levels (as of this writing, WTI crude is around $70 per barrel) is because of the reluctance of global oil producers to invest in new exploration and production (termed E&P) projects. After briefly rebounding to about $80 at the beginning of this year, SLB is about 21% lower and is close to its lowest point in the last two years. Does that mean the stock is a good value right now?

    In their latest quarterly earnings report, SLB’s CEO gave his view of the long-term state of the oil market. In it, he pointed out that while producers have been seeing better results lately, service companies like SLB have been forced to bid for limited project work; the excess equipment available relative to demand has limited the industry’s ability to follow producer’s trends higher, at least until the last quarter. It appears that global markets are finally starting to increase their production activity, which means that the demand for oil services like those provided by SLB is finally starting to improve. In fact, SLB projects that they will have no spare equipment capacity by the end of 2018, which will give them the ability to negotiate more favorable pricing arrangement with their customers.



    Even more favorable in the long term is that while U.S. producers have been able to ramp up production quickly is the relatively short amount of time it takes to drill a shale well. On the other hand, producers in other parts of the world don’t have the ability to bring inactive rigs back online so quickly, but the fact is that OPEC’s spare capacity, which has historically always held some capacity in reserve is at levels not seen since Operation Desert Storm in the early 1990’s. OPEC has finally decided to start increasing production, but that will also require those countries to invest in new products and projects. That means more E&P, which is exactly the kind of tune that oil service companies like to hear. That could offer a great opportunity in the long-term for investors who are interested in investing in this segment of the global economy.

    I think it is important to pay attention to what executives say about their respective markets, certainly even more than it is to track analyst forecasts. However, as a value-oriented investor, I also have to balance that information against what a company has been doing. That means using historical information to determine if the stock’s current price justifies making any kind of a bet on the long-term prospects of any stock I’m thinking about. In the case of SLB, I think the future looks encouraging, and the stock’s current price is intriguing; but based on their performance over the recent past, it doesn’t quite represent the kind of value that would make anxious to find a new opportunity right now. Here are the numbers.



    Fundamental and Value Profile

    Schlumberger N.V. provides technology for reservoir characterization, drilling, production and processing to the oil and gas industry. The Company’s segments include Reservoir Characterization Group, Drilling Group, Production Group and Cameron Group. The Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. The Drilling Group consists of the principal technologies involved in the drilling and positioning of oil and gas wells. The Production Group consists of the principal technologies involved in the lifetime production of oil and gas reservoirs and includes Well Services, Completions, Artificial Lift, Integrated Production Services (IPS) and Schlumberger Production Management (SPM). The Cameron Group consists of the principal technologies involved in pressure and flow control for drilling and intervention rigs, oil and gas wells and production facilities. SLB has a current market cap of about $87.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by impressively, at more than 23%, while sales grew a little over 11%. That growth is in contrast to the company’s profile, since over the last twelve months, Net Income as a percentage of Revenues was negative, at -2.34%. The picture has gotten better over the last quarter, which I believe is a reflection of improving market conditions as described by SLB’s CEO, to a little over 5%.
    • Free Cash Flow: SLB’s free cash flow is healthy, at more than $3.5 billion. This number declined from mid-2015, when it was more than $7.5 billion, to a low in mid-2017 at about $3 billion. That’s growth in Free Cash Flow of about 16.6% in the last year.
    • 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 SLB is $26.66 and translates to a Price/Book ratio of 2.36 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.66, suggesting the stock is only about  12.7% undervalued, with a long-term target price around $71 per share. Using the stock’s Price/Cash Flow ratio shows the stock remains overvalued, since its price is current about 10.5% above that ratio’s historical average. Interestingly, at $56 per share the stock would be roughly in-line with its historical Price/Cash Flow ratio, but 20% below its historical Price/Book ratio. That gives me a good reference point for a minimum price at which I would want to see the stock priced at before I would be willing to say it is discounted enough to justify a new position.



    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 December 2016 until the end of 2017; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. if you discount the temporary, rapid rise from the stock’s trend low point in December 2017 to its peak at about $80 in late January this year, the stock has mostly been holding a sideways trend throughout the year. Last month, the stock dropped below its sideways range up to that point and appears to be establishing a new trading range, with support around $62 and resistance right around $65.
    • Near-term Keys: I would look for a push above July’s peak around $69 to mark any kind of new, potential upward trend; that would be the minimum price that I would begin thinking about any kind of short-term bullish trading opportunities. As a value investor, I would watch the stock with a weather eye on the stock’s trend low from December 2017 around $61 as a critical test of any continued stabilization or price consolidation. A drop below that point would likely give the stock room to drop down into the $56 range – a level the stock hasn’t actually seen since August of 2010. That is where I would start giving a long-term position in the stock some serious thought.


  • 03 Sep
    Which stock is a better actual value: GIL or HBI?

    Which stock is a better actual value: GIL or HBI?

    When you spend a lot of time analyzing different segments of the market, it isn’t all that unusual to come across two competing companies in an industry that both look appear to have a pretty good argument as a good bargain opportunity in the making. When it happens, as an investor you have a decision: which one should you pick? Or, if you have the capital to work with, should you bother choosing at all, or simply work with both of them? It’s the kind of thing that I like to call “a good problem to have,” because you get to choose between two pretty good things, and that usually means that whatever you decide to do, you’ll have a pretty good chance of seeing it work out okay.

    The problem, of course, is that just because you might find a couple of stocks in the same industry that look good, it doesn’t mean that everything is as it seems. Sometimes what looks like a great opportunity is, in reality a bigger risk than you might realize until it’s too late. This is the situation I found myself in earlier this week when I started evaluating Gildan Activewear Inc. (GIL) and HanesBrands Inc. (HBI), two stocks in the Textiles & Apparel industry. You’ve probably heard of HBI, of course; I don’t think there are too many men who haven’t worn a Hanes or Champion t-shirt, or that many women who haven’t bought Maidenform or Wonderbra undergarments or L’eggs nylon stockings. You may not be as familiar with GIL; they make the same products as HBI, and they sell them under some of their own brands, like Gold Toe, American Apparel, and others. A big portion of their business, however, focuses on branded apparel for the printwear market.



    I’ve followed both stocks for some time, in part because I like both of their products; for another, I think that while the industry exists in the Consumer Discretionary sector, which can be subject to economic cyclicality, the specific niche they both reside in makes them pretty attractive as stocks that should hold up well when the economy shifts to the downside. I like the idea of working with stocks like these as defensive positions; and the fact is that both stocks have generally underperformed the market over the course of the year.

    This week the S&P 500 pushed above resistance from its late January high after the Trump administration it had reached an agreement with Mexico to rework the NAFTA trade agreement; the market seems anxious to treat the news as the first domino to fall in favor of easing trade tensions with America’s largest and most important trading partners. There’s a long way to go, however, and a completion of the agreement, or of seeing it affect the other countries the Trump administration has targeted with tariffs in the way many hope it could isn’t a given. Even if things work out as many hope in the long run, the fact remains that the market is so extended that a significant reversal is inevitable sooner or later. That means that it’s smart to keep paying attention to defensive-oriented stocks that can position you to weather the storm of a reversal more effectively than stocks trading at extremely high valuations are.

    The fact that both stocks are well below their 52-week highs is a positive, of course, but it still doesn’t mean that they both automatically represent a terrific value right now. The truth is that if you simply paid attention to each stock’s current long-term downward trend, you’d probably conclude HBI is the better option, since it is only about $1 above its 52-week low price right now, down nearly 25% so far in 2018 and almost 32% lower for the past twelve months. By comparison, GIL is down only about 14% so far for the year, and only about 6% for the last twelve months. Digging deeper into the fundamentals for each stock, however paints a pretty different picture.



    Gildan Activewear, Inc. (GIL)

    Current Price; 29.45

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 6%, while revenue increased almost 7%.  The numbers for GIL have gotten better recently, however, with earnings growing nearly 53%, and revenue improving more than 18% in the last quarter. The company cited strength in its United States-focused brands in its last earnings report, which is interesting given the fact this is a Canadian stock that most would likely figure to be hurt by ongoing trade tensions with its neighbor to the south.
    • Free Cash Flow: GIL’s free cash flow is healthy, at more than $388.24 million. This is a positive, although this number has declined since the beginning of the year from a peak a little above $500 million.
    • Dividend: GIL’s annual divided is $.44 per share, which translates to a yield of 1.49% 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 GIL is $9.15 and translates to a Price/Book ratio of 3.27 at the stock’s current price. The stock’s historical average Price/Book ratio is 3.32, suggesting at first blush that the stock is fairly valued. The picture gets more interesting, however, when you factor in the stock’s Price/Cash Flow ratio, which is currently running more than 70% below its historical average. That puts the stock’s long-term target price above $51 – well above its all-time high price from January of this year at around $34.50 per share.



    Hanesbrands Inc. (HBI)

    Current Price: $17.54

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by more than 15%, while revenue increased about 4%.  The numbers for HBI are better in the last quarter, with earnings growing 73%, and revenue improving about 16.5% in the last quarter.
    • Free Cash Flow: HBI’s free cash flow is healthy, at more than $462 million. This is a positive, although this number has declined since the first quarter of 2017 from a peak at close to $900 million.
    • Dividend: HBI’s annual divided is $.60 per share, which translates to a yield of 3.43% 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 HBI is only $2.13 and translates to a Price/Book ratio of 8.22 at the stock’s current price. The stock’s historical average Price/Book ratio is 7.18, suggesting at first blush that the stock is slightly overvalued. Like GIL, the picture gets more interesting when you consider the stock’s Price/Cash Flow ratio, which is currently running more than 200% below its historical average. That puts the stock’s long-term target price above $38, which is above the stock’s highest point since early 2015.

    Based on the numbers shown so far, both stocks look like pretty great value plays, right? Not so fast, because the truth is that I think HBI carries a much higher risk than GIL does right now, despite its much lower current price and attractive upside forecast. A significant divergence between these two companies comes when you dive into their use of debt and their operating margin profile.



    GIL currently shows $900 in long-term debt on their books. In and of itself, of course, debt isn’t automatically a bad thing, and GIL’s debt to equity ratio of .47 generally suggests the debt they have is very manageable. More importantly, the percentage of Net Income to Revenue has improved from 12.5% for the last twelve months, which is pretty healthy, to more than 14% in the last quarter. By comparison, HBI has more than $4.1 billion in long-term debt to go along with a debt to equity ratio of 5.41. That is a very high number that indicates HBI is one of the most highly leveraged companies in its industry. Their operating profile also suggests that they could have problems servicing their debt; over the last twelve months, Net Income as a percentage of Revenues was barely .5%. This number did improve in the last quarter to a little over 8%, but remains significantly below the level maintained by GIL.

    When most of the information about two stocks looks similarly attractive, a discriminating investor has to be able to split hairs to determine if one company’s opportunity is more worth the risk than the other. In this case, the fact that GIL shows a much more manageable debt burden, with operating discipline that has enabled it to not only maintain a stable level of profitability, but also to improve it, makes it a better bet than its more recognizable competitor.


  • 31 Aug
    How much should value investors pay for PRU?

    How much should value investors pay for PRU?

    Every time I start evaluating a stock as a potential investment, one of the first questions I have to answer for myself isn’t just about what the stock is doing right now; it’s about what price I think the stock should be at to represent an excellent value. As a committed value hunter, it really isn’t enough for me to say that a stock has great fundamental strength, or that its trend is moving the way I want it to right now. I also need to find a compelling reason to believe the stock should be worth significantly more down the road than it is today.

    Of course, fundamental strength and a stock’s current trend do play a role in that evaluation – but not in exactly the way most investors think. Over the years, I’ve often heard people equate value investing with contrarian investing, and maybe that’s one of the reasons I’ve come to appreciate the approach as much as I do. One of the basic ideas of contrarian investing suggests that the best investment opportunities lie in the areas that the market isn’t paying attention to right now; you’re going against the grain of the rest of the market and its trends. That’s one of the reasons that downward trends don’t concern me as much as they would if I were focusing primarily on shorter-term methods like swing or momentum trading.



    The truth is that for me, downward trends represent one of the easiest ways to start spotting good value opportunities. That’s a primary reason that just about any time I write about a stock, you’ll usually see that it’s been following a downward trend for a significant portion of time. Sometimes, downward trends are driven by significant problems within a company’s business, problems that threaten the company’s well-being and ability to survive in an increasingly competitive world. Sometimes, however, those trends are driven more by external macroeconomic factors, or simply by negative investor sentiment that ignores the underlying strength of the stock’s business. Those are the opportunities that I look for, because those downward trends really just mean that the stock’s current price could be a bargain compared to where it should be.

    Prudential Financial, Inc. (PRU) is an interesting study in value analysis. Like most stocks in the Financial sector this year, the stock has struggled to form any significant upward momentum; after peaking at around $127 in late January, the stock has dropped back significantly, touching an eight-month downward trend low at around $93 in the beginning of July. That’s a decline of almost 27%, which puts the stock squarely in its own bear market territory. Lately, however the stock has been stabilizing a bit and even looks like it is starting to build some bullish momentum. That, along with the stock’s mostly solid fundamental profile creates an interesting value proposition.



    Fundamental and Value Profile

    Prudential Financial, Inc., is a financial services company. The Company, through its subsidiaries, offers a range of financial products and services, which includes life insurance, annuities, retirement-related services, mutual funds and investment management. The Company’s operations consists of four divisions, which together encompass seven segments. The U.S. Retirement Solutions and Investment Management division consists of Individual Annuities, Retirement and Asset Management segments. The U.S. Individual Life and Group Insurance division consists of Individual Life and Group Insurance segments. The International Insurance division consists of International Insurance segment. The Closed Block division consists of Closed Block segment. The Company has operations in the United States, Asia, Europe and Latin America. PRU has a current market cap of about $41 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by a little over 44%, while revenue decreased almost 3%. That isn’t a great indication, but it is actually better than the results most companies in the insurance industry have reported, where earnings fell over the same period.
    • Free Cash Flow: PRU’s free cash flow is very strong, at more than $15.4 billion. This number has more than doubled over the last year, when Free Cash Flow hit a bottom at around $6 billion.
    • Dividend: PRU’s annual divided is $3.60 per share, which translates to a yield of 3.65% 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 PRU is $116.53 and translates to a Price/Book ratio of .84 at the stock’s current price. The stock’s historical average Price/Book ratio is .98, suggesting the stock is almost 17% undervalued, with a long-term target price around $114 per share. The picture gets more interesting when you factor in the stock Price/Cash Flow ratio, which is currently running about 28.5% below its historical average. That increases the stock’s long-term target price to about $126.50, which puts the stock within spitting distance of the all-time peak it hit in January at around $127 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 upward trend until January of this year; it also provides the basis for the Fibonacci retracement lines shown on the right side of the chart. The stock’s downward trend from January to this point is easy to spot, and its stabilization range between support around $96 and resistance around $102 is well-illustrated by its price activity over the last few weeks within the 38.2% and 50% retracement lines. This a good early indication the stock’s current downward trend could be about to reverse; the longer that range holds, the more likely a strong move back to the upside becomes. In the same sense, a break at any point above the $102 level, accompanied by strong buying volume would provide a visual confirmation that the stock is actually in the early stages of a new upward trend. A break below support at $96, however should put investors on notice that the downward trend remains in force, with a push below $92 acting as a signal that trend should extend into an even longer timeframe.
    • Near-term Keys: If you like the stock’s value proposition at its current price, and are willing to hold the stock for the long-term, you could do much worse than to buy a high-dividend paying stock at the kind of discount PRU is offering right now. If you’re looking for a way to work with shorter-term strategies, you would need to wait for a break above $102 to buy the stock or start working with call options, or a drop below $92 to short the stock or start using put options.


  • 30 Aug
    SYMC looks like a value trap!

    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%. More →

  • 29 Aug
    In wake of U.S.-Mexico agreement, OSK could be an interesting Industrial play

    In wake of U.S.-Mexico agreement, OSK could be an interesting Industrial play

    The big news this week has really been all about the announcement from President Trump that the U.S. and Mexico have agreed to enter a new trade deal that will effectively replace the longstanding NAFTA agreement between the two countries and Canada. The specifics of the deal still remain to be seen, since in many respects they haven’t been finalized; but so far it appears to focus heavily on the auto industry, expanding the criteria for how much of an automobile must be produced in North America to qualify for tariff protection, increasing the requirement for sourcing aluminum and steel from local producers, and specifying a minimum wage of $16 per hour for workers.

    Of course, Mexico is just one of several countries the Trump administration has been targeting for changes in trade policy and agreements; but the market seems to hope that they are just the first domino to fall and ease tensions between the U.S. and its largest trade partners, including Canada, the European Union and, perhaps most significantly, China. Steel and aluminum tariffs, which were the first to be imposed this year, now appear to be in position to also be the first to ease – a development that bodes well for the prospects not only of the auto industry but also of related industries, including heavy machinery.



    One of the challenges lately for investors interested in some of the largest players in the Heavy Machinery segment is that most of the most well-known companies, like Caterpillar (CAT) and Deere & Company (DE), are already pretty expensive, running at prices well above $100 per share. Oshkosh Corporation (OSK) is a somewhat smaller player in the industry, being categorized as a mid-cap stock versus the large-cap status of its larger brethren, and it has the added bonus of being available at a lower stock price; but don’t let its smaller size fool you. This is a company that recently celebrated 100 years in business, and offers a range of vehicles that cover construction, waste management, field service and access, military and emergency response and service vehicles. Like most Heavy Machinery stocks, OSK has dropped for most of the year and is currently down about 29% since hitting an all-time high at about $100; but with a strong fundamental profile and a promising value proposition, this looks like a stock that could present a good long-term opportunity.

    Fundamental and Value Profile

    Oshkosh Corporation (OSK) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire and emergency vehicles, concrete mixers and refuse collection vehicles. The Company’s segments include Access Equipment; Defense; Fire & Emergency, and Commercial. The Access Equipment segment consists of the operations of JLG Industries, Inc. (JLG) and JerrDan Corporation (JerrDan). The Defense segment consists of the operations of Oshkosh Defense, LLC (Oshkosh Defense). The Fire & Emergency segment consists of the operations of Pierce Manufacturing Inc. (Pierce), Oshkosh Airport Products, LLC (Airport Products) and Kewaunee Fabrications LLC (Kewaunee). The Commercial segment includes the operations of Concrete Equipment Company, Inc. (CON-E-CO), London Machinery Inc. (London), Iowa Mold Tooling Co., Inc. (IMT) and Oshkosh Commercial Products, LLC (Oshkosh Commercial). OSK has a current market cap of about $5.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by about 19.5%, while revenue increased almost 7%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long-term; but it is also a positive mark of management’s ability to maximize its business operations effectively. The company operates with a narrow operating margin; over the last twelve months, Net Income was about 5.5% of Revenues. This number increased in the last quarter to a little above 7%.
    • Free Cash Flow: OSK’s free cash flow is healthy, at more than $253 million. This number has increased steadily since early 2017, from below zero.
    • Dividend: OSK’s annual divided is $.96 per share, which translates to a very impressive yield of 1.34% 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 $33.11 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 2.14, meaning that the stock is practically at par with its Book Value. That doesn’t sound like there is much room to grow; but another measurement that I like to use to complement my analysis is the stock’s Price/Cash Flow ratio; in the case of OSK, the stock is trading more than 82% below its historical Price/Cash Flow ratio. While a target price at nearly $130 is probably not realistic – the stock only hit $100 for the first time in January of this year – it does imply that there is good reason to suggest the stock’s January highs are well within reach.



    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 upward trend until the beginning of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. It’s easy to see the downward trend the stock has followed for most of this year; however it is also interesting to note that since late June, the stock has shown some resilience, with support in the $69 range and short-term resistance at around $75 per share. The stock would need to push above this range to begin forming a new upward trend, while a drop below $69 could see the stock drop to as low as the $56 level as shown by the 88.6% Fibonacci retracement line.
    • Near-term Keys: The stock would need to break above $75 to give a good bullish signal that you could act on, either for a short-term, momentum-based trade with call options, or to buy the stock outright with a plan to hold for a longer period of time. A drop below $69 could be an opportunity to work the bearish side by shorting the stock or by buying put options.


  • 28 Aug
    Why AT&T really does look like a solid value play

    Why AT&T really does look like a solid value play

    While the tech sector, in a broad sense, has been one of the most stellar performers in the marketplace for the past few years, telecommunications stocks, almost all of which have operations that naturally bleed into many of the same areas as some of the largest tech companies in the world, haven’t followed suit. More →

  • 27 Aug
    SYF lost Walmart credit cards – is that really a bad thing?

    SYF lost Walmart credit cards – is that really a bad thing?

    If you’ve applied for a credit card at a retail store such as Walmart, Target, or even J.C. Penney, you’ve actually become a customer for a business like Synchrony Financial (SYF), a leading provider of store-branded credit cards. More →

  • 24 Aug
    FAANG bubble? Basic valuation analysis says YES!

    FAANG bubble? Basic valuation analysis says YES!

    This New Tesla Coil is the Future of Electricity

    In 1891, Nikola Tesla stunned the scientific community by inventing a device that could transmit electricity through the air. This breakthrough device could power light bulbs and electric motors wirelessly, at a distance of a few feet.

    Read More

    It’s not quite 20 years since the “dot-com boom” became the “dot-com bust,” but as the market extends itself into the longest bull market in history, it’s hard not to see some of the same characteristics between the stock market in the years leading up to that crash and this one. More →

  • 23 Aug
    Is OC’s discount worth the fundamental risk?

    Is OC’s discount worth the fundamental risk?

    Watch America’s #1 Trader Officially Become $1,050 RICHER in 15 SECONDS!

    And then $940 RICHER in 11 seconds… $1,260 RICHER in 8 seconds… and $988 RICHER in 7 seconds! You’ve never seen anything like this. And you may NEVER see it again! His secret to becoming a multimillionaire is so easy that anybody can do it!

    Read More

    One of the classic hallmarks of the economy’s health and strength is the housing market. Stocks of retail companies like Home Depot (HD) and Lowe’s (LOW) often serve as proxies of to guide the market’s perception of the housing market, but it also isn’t uncommon to see experts and analysts referring to homebuilders like D.R. Horton (DHI) and Toll Brothers (TOL) in the same way. More →

    By Thomas Moore Housing Market Investiv Daily
  • 22 Aug
    SAFM is a small-cap, defensive diamond in the rough

    SAFM is a small-cap, defensive diamond in the rough

    Watch America’s #1 Trader Officially Become $1,050 RICHER in 15 SECONDS!

    And then $940 RICHER in 11 seconds… $1,260 RICHER in 8 seconds… and $988 RICHER in 7 seconds! You’ve never seen anything like this. And you may NEVER see it again! His secret to becoming a multimillionaire is so easy that anybody can do it!

    Read More

    If the extended state of the market’s bull run – which is nearly 10 years in the running now – is starting to make you wonder how much longer the “good times” are going to last, you’re in a relatively small, but growing group of people that are becoming increasingly wary. One of the things that not a lot of people understand, however is that even in a bearish market, you can keep finding good stocks to invest in with good long-term growth potential, if you’re willing to be cautious and selective. You also have to be able to work with a long-term perspective, because if the economy and the market do begin to reverse, the turn lower can come very quickly; that often means that even stocks that right now are trading at great valuations and fit into the “bargain” category under current market conditions are at risk of following the broader market’s trend to the downside.

    One way you can try to minimize some of that risk is by focusing on stocks that analysts and experts like to call “defensive” in nature. These are businesses that offer products or services that are needed no matter what the economy is doing, so their revenues generally manage to be pretty stable. If they’re conservative about the way they manage their business, that usually means that even if their profits get squeezed by tighter economic conditions, they’ll be able to weather the storm better than most other stocks in more cyclic sectors and industries.



    One of the industries that fits into this “defensive” category is Food Processing. This is an industry that includes some big, well-known names like Kellogg Company (K), General Mills (GIS), Kraft-Heinz (KHC), Campbell Soup (CPB) and Tyson Foods (TSN). Over the last year or so, this is also an industry that has come under a lot of pressure by investors who have been concerned that consumer trends are shifting away from many of these traditional names to smaller, trendier companies who are perceived as offering healthier options. The bigger companies have been scrambling to find ways to adjust to this shift, but that has also created some nice value options in the industry with stocks that have a terrific fundamental profile to use as a baseline and the size, resources, and responsiveness to make the adjustments they need to stay relevant.

    One stock in this sector that I think has a great fundamental profile to work with, and appears to already be well-positioned to work with the trend toward healthier food options is Sanderson Farms Inc. (SAFM). This is a small-cap stock that a lot of people might not recognize at first blush; but this is a company with a singular focus. Investors who prefer to see a company with a diversified portfolio might look at the fact SAFM focuses exclusively on protein from poultry as a negative; but this is the third largest poultry processor in the United States, with a model that allows them to function profitably as a low-cost provider of protein products. As I think you’ll see, there is a pretty strong case to be made for this stock as a serious value opportunity, even under current market circumstances.



    Fundamental and Value Profile

    Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business. SAFM has a current market cap of about $2.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined by more than 37%, while revenues were mostly flat. In the most recent quarter the picture was markedly improved, as earnings tripled and sales grew a little over 5%.
    • Free Cash Flow: SAFM’s free cash flow is healthy, at about $142.5 million.
    • Dividend: SAFM’s annual divided is $1.28 per share and translates to a yield of 1.18% 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 SAFM is $66.47 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 2.08, which puts a target price for the stock a little above $138 per share – nearly 33% above its current price. That puts the stock in a range it last saw during the last week of 2017.



    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 longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After reaching a peak around $175 in early December of last year, the stock began an accelerated and extended drop to a downward trend low around $97 by June of this year. Since finding that bottom, the stock has been hovering in a range between $97 at support and resistance at around $109 per share. The 61.8% retracement line, at a price level around $113, is a pretty good visual reference for the point the stock would need to rally to in order to reverse the stock’s current downward trend.
    • Near-term Keys: A strong push above $113, with strong buying volume would act as a good signal the stock is about to shift back to the up side; that would provide a good entry point for a bullish trade by buying the stock outright or by working with call options. On the other hand, if the stock breaks down and drops below $97, the expectation would be that the long-term downward trend is likely to extend even further. That could provide a good opportunity to work the bearish side either by shorting the stock or working with put options, with a target price in the short term between $85 and $89 per share, with the stock’s 2-year low around $74 not out of the question.


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