Value Investing

  • 17 Dec
    Is WHR a good buy right now?

    Is WHR a good buy right now?

    With the stock market pushing down to test levels near its lowest points from earlier this year, a lot of investors are on edge right now. The market is back into correction territory, and has pushed below its more recent low point around the end of October. A continued decline will not only steepen the severity of the correction, but also increase speculation, uncertainty and risk that the market will finally, after a practically uninterrupted bullish run of more than nine years, move into legitimate bear market territory. More →

  • 13 Dec
    Is LOW cheap enough yet?

    Is LOW cheap enough yet?

    Over the course of this last quarter of the calendar year, one of the areas of the market that has come under the most pressure is the Consumer Discretionary sector. From April until September, this sector was one of the market leaders, as a generally healthy economy drove retail stocks across a range of industries like Kohl’s (KSS), Target Stores (TGT), Home Depot (HD), and Lowe’s Companies, Inc. (LOW) to all-time high levels; but as anxiety about global tariffs combined with questions about whether the economy was finally starting to reach a peak, this sector dropped well into correction territory and is down a little over 12% since the beginning of September.

    Home improvement stocks like HD and LOW seem to be an interesting economic barometer, especially as it relates to consumer-level impact. A healthy economy generally means increasing home ownership, both for new homes as well as existing, older homes. That is usually a good thing for this industry, since homeowners naturally have to spend money to maintain their homes. Another element that plays a role, of course is interest rates.  Low rates not only motivate higher borrowing for mortgages, but also spur increased home improvement sales as consumers spend and borrow money to upgrade and improve existing homes.

    The fact rates have been increasing isn’t a positive for this industry, and in fact is one of the things that I believe have played a role in pushing HD and LOW into bear market territory over the last three months; but recent economic data seems to be giving the market reason to believe that the Fed may slow the pace of interest rate increases. On a historical basis, rates remain relative modest, which means a slower pace, or even a pause in rates could give this industry a boost in 2019. LOW is an interesting company, in the midst of a corporate transformation, with a new management team that is mapping out a new strategy that includes selling non-core businesses, lowering costs and improved store execution. They are down more than 20% over the quarter, which means that the stock is underperforming versus the broader sector and is in bear market territory. There are some interesting fundamental qualities that I think make LOW worth watching; but I’m not sure the long-term outlook for the stock is quite as positive as I would like to see.



    Fundamental and Value Profile

    Lowe’s Companies, Inc. (Lowe’s) is a home improvement company. The Company operates approximately 2,370 home improvement and hardware stores. The Company offers a range of products for maintenance, repair, remodeling and decorating. The Company offers home improvement products in categories, including Lumber and Building Materials; Tools and Hardware; Appliances; Fashion Fixtures; Rough Plumbing and Electrical; Lawn and Garden; Seasonal and Outdoor Living; Paint; Flooring; Millwork, and Kitchens. The Company also supports the communities that focus on K-12 public education and community improvement projects. The Company serves its customers in the United States, Canada and Mexico. LOW’s current market cap is $75.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined about -1%, while sales grew almost 4%. The last quarter didn’t improve the earnings picture, since earnings declined almost -50%, while sales dropped close to -17%. The company operates with a very narrow margin profile that seems to be getting even narrower; Net Income versus Revenues over both the past year was 5.18%, but decline in the most recent quarter at about 3.6%.
    • Free Cash Flow: LOW’s free cash flow is one of most impressive aspects of their fundamental profile, at $5.3 billion. That translates to a Free Cash Flow Yield of 7.2%. Another positive is the fact Free Cash Flow has increased significantly since the beginning of the year, when it was about $4 billion.
    • Debt to Equity: LOW has a debt/equity ratio of 2.68 and makes them one of the most highly leveraged companies in their industry. While their balance sheet indicates operating profits are sufficient to service their debt, liquidity is a question mark; cash is a little over $1.8 billion while long-term debt is almost $14.5 billion.
    • Dividend: LOW pays an annual dividend of $1.92 per share, which translates to a yield of about 2.1%.
    • 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 LOW is only $6.72, and which translates to a Price/Book ratio of 13.76 at the stock’s current price. Their historical average Price/Book ratio is 10.36, which means that even with the stock down 20% since September, it remains almost 25% overvalued right now. The fact is that based on Price/Book ratio, the stock can’t really be considered a good value until it drops to about $55. The last time the stock was in that price range was October of 2014.



    Technical Profile

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

     

    • Current Price Action/Trends and Pivots: LOW isn’t far from the 52-week lows it established earlier this year in the $81 to $83 price range. The momentum of the stock’s downward trend right now means that the stock would have to break above resistance at $95 to mark any kind of consolidation range right now, with a break above $100 a good technical reference for an actual bullish trend reversal. If the stock breaks below its current pivot support around $86, look for strong consolidation in the $81 to $83 range. A drop below that level would mean the downward trend will likely continue for the foreseeable future, with the next most likely support level around $75. 
    • Near-term Keys: A push above $95 could set up an interesting bullish swing trade using call options, with a near-term target price at around $100. If the stock breaks its current support, you might consider shorting the stock or buying put options with an eye on the stock’s 52-week low around $81 as an exit point for that trade. The fact is that the stock’s value proposition right now just isn’t interesting enough to justify any kind of long-term position on this company. They are interesting potential turnaround story, it is true; but I would prefer to wait to see new management’s strategy paying off in the form of improving general fundamental strength, lower debt levels, and improving Book Value.


  • 12 Dec
    ADM is an interesting defensive play – is it a good value?

    ADM is an interesting defensive play – is it a good value?

    Bearish pressures for the past few days have pushed the market back down near to its 52-week lows. It seems like each time the market tests its major support, more and more talk starts to be about the increasing likelihood that the longest bull market in recorded history is finally going to end. So far this year, each time that’s happened the market has managed to stage yet another rally; but given the extremely extended state the market remains in, even being in corrective territory right now does seem to suggest that support will probably only hold for long. More →

  • 11 Dec
    Is FEYE’s upward trend sustainable?

    Is FEYE’s upward trend sustainable?

    Politics have been putting more pressure than normal on the stock market of late; after the Trump administration announced a preliminary agreement with China to halt imposition of any new tariffs at the beginning of this month following the G20 summit in Buenos Aires, the market seemed poised to rise a new wave of bullish momentum and sentiment. More →

  • 10 Dec
    Transports are down 16% since September – but that doesn’t make SKYW a good bargain

    Transports are down 16% since September – but that doesn’t make SKYW a good bargain

    The market hasn’t been kind to the Transportation sector since the end of the third quarter of the year. As measured by the S&P Transportation SPDR ETF (XTN), the sector declined from its 52-week highs at the beginning of September nearly 20% by Halloween before staging a temporary rally through November. Since the beginning of the month, however the sector has dropped back near to its yearly lows. More →

  • 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 →

  • 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 →

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