My personal preference when I look at different stocks as investing opportunities is to consider their usefulness over a long-term period of time. That generally means that while I like to look at technical charts and identify near-term patterns to get an idea of what the market is doing with a stock right now, I have to use a stock’s underlying business to determine whether or not there is a good reason the stock should be worth a higher price in the future. If there isn’t, more often than not I’ll set the stock aside and go find something else.
That isn’t to say that there aren’t times and settings when a good short-term trade is the smart way to go. I like to look for opportunities that I believe offer a combination of high reward and low risk, with the best probability possible that the trade will go my way. Those can be tough to find on a short-term basis (where probabilities usually run in the 25 – 30% at best), but from time to time they do show up. Fastenal Co. (FAST) looks like it could be a good example right now.
Fundamental and Value Profile
Fastenal Company is engaged in wholesale distribution of industrial and construction supplies. The Company is engaged in fastener distribution, and non-fastener maintenance and supply business. As of December 31, 2016, it distributed these supplies through a network of approximately 2,500 stores. Its customers are in the manufacturing and non-residential construction markets. The manufacturing market includes both original equipment manufacturers (OEM) and maintenance, repair, and operations (MRO). The non-residential construction market includes general, electrical, plumbing, sheet metal and road contractors. Other users of its products include farmers, truckers, railroads, oil exploration, production and refinement companies, mining companies, federal, state, and local governmental entities, schools and certain retail trades. Its original product offerings are fasteners and other industrial and construction supplies, many of which are sold under the Fastenal product name. FAST has a current market cap of $15.1 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 32%, while sales grew a little over 13%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations.
- Free Cash Flow: Free Cash Flow is healthy, at a little more than $412 million over the past twelve months despite its decline over the last quarter.
- Debt to Equity: the company’s debt to equity ratio is .18, which is a low, very manageable. Their balance sheet indicates operating earnings are more than sufficient to service their debt, with healthy cash reserves as well.
- Dividend: FAST pays an annual dividend of $1.48 per share, which translates to an annual yield of 2.81% 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 FAST is $7.55 per share. At the stock’s current price, that translates to a Price/Book Ratio of 6.96. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Industrial Distribution industry’s average is 4.6, so FAST’s Price/Book ratio is well above the industry average, which to a fundamental investor is a clear sign of the stock’s overbought status.
Here’s a look at the stock’s latest technical chart.
- Current Price Action: Over the last year, the stock’s trend is up, coming from around $41 to its current level a little below $53 per share. Its 52-week high was reached in early March at nearly $59 per share, followed by a short-term downward trend that was halted in early May at around $48. The stock has since rallied from that point to its current price.
- Trends and Pivots: The diagonal, dotted red line indicates the stock’s intermediate trend, which is mostly down despite the upward momentum of the last month. This is true primarily because after rallying to about $54, the stock dropped back a bit lower from that point. That pivot high marked a pause of the stock’s short-term upward trend that could be opening up the trading opportunity I’m writing about today. The A, B, and C labels mark the pivot points that create a classic ABC pullback pattern, which usually signals a very attractive short-term bullish swing trade.
- Near-term Keys: Watch the stock’s movement carefully over the next few days. A move to $54 would break the intermediate trend’s resistance and would act as a good signal point for a good bullish trade, either by buying the stock or working with call options, with a target price to close the trade at around $57.50. On the other hand, a drop below $51 could see the stock break the short-term upward trend support level, which might offer an attractive bearish trade, either by shorting the stock or using put options, with a closing target price at around $48.50.