The market has been moving closer and closer into bear market territory, and if you’re a conservative investor, that is something that should make you more and more aware of the increasing risk of taking on new positions. If we are, in fact looking at the beginning of a new bear market, history suggests the worst is still ahead; the two previous bear markets in this century both saw the stock market decline by more than 50% before finding a bottom.
What should you do? If you’ve been fully invested in the market for the last few years, you’ve probably been able to reap some very impressive investment results as the market saw an almost completely uninterrupted move higher from early 2016 to the beginning of this year. Despite the fact that the S&P 500 is down a little over 18% from its latest all-time high reached in September, it is still only down about 10% since the beginning of January to now. That means that if you are still fully invested, you’re likely down, but not so much yet that it really represents a hardship; it may not have really set off any warning bells yet. That’s why it’s probably a good time to start taking profits off of the table and thinking about increasing the percentage of cash in your accounts.
An ultra-conservative approach is to close all of your current positions and sit in cash for as long as you think the market is going to stay bearish. I think a smarter approach is to start taking profits if you have them to increase your available cash, but to keep an eye out for new opportunities as the market makes them available. Deep corrections like what the market is in now, as well as bear markets tend to push stocks throughout the market to historically low levels no matter whether the stock is fundamentally strong or weak; the stocks with a solid fundamental base to work from, however are the ones that value investors pay attention to, and on a very selective basis will take new positions in even in the midst of continued bearish conditions.
BorgWarner Inc. (BWA) is a good example of the kind of fundamentally solid stock I’m referring to. The market has really beat this stock up; it’s down almost 34% through 2018 and more than 42% from its high in late January. BWA is a stock in the Auto Components industry, and automotive stocks have had a hard time throughout the year as trade tensions between the U.S. and its biggest trading partners put investors on edge, as well as higher oil prices. The market’s latest drop this month has accelerated the stock’s downward trend, and that does mean that it might not be done dropping. A lot of investors would allow that downward trend to overshadow the stock’s fundamental strength, but the truth is that even if the decline continues, it really just means that this stock’s value proposition is getting better all the time. That means that this is a stock you should be paying attention and thinking about when the right time to take a position might be.
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 has a current market cap of about $7 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased 5.26%, while revenues increased about 2.5%. The company’s margin profile shows that Net Income as a percentage of Revenues improved from a little over 5% over the last twelve months to almost 10% in the last quarter.
- Free Cash Flow: BWA’s free cash flow is adequate, at $552 million. This number has improved significantly since the last quarter of 2015, when it dropped below $150 million, however it has dropped from a high at the end of 2017 at about $620 million.
- Debt to Equity: A has a debt/equity ratio of .50. This is a very manageable number, however it is also worth noting that the company has a little over $2 billion in debt versus just about $361 million in cash and liquid assets as of the last quarter. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.
- Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 2.01% 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 $20.02 and translates to a Price/Book ratio of 1.68 at the stock’s current price. Their historical average Price/Book ratio is 2.96, suggesting suggests the stock is currently trading at a significant discount of about 42%. That is supported by the stock’s Price/Cash Flow ratio, which is currently about 55% below its average. Together, these providing a very compelling reason to take this stock seriously, with a long-term price around $59 and $66 per share. That means the stock has some very good fundamental reasons to drive back to the highs it set at the beginning of the year, and even to possibly test its all-time highs, which were reached in 2014 at around $67 per share.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: Since hitting its 52-week high at around $58, the stock has followed a significant long-term downward trend. The trend has accelerated so far this month, dropping a little over $6 from about $40 to its current level. The stock is currently at levels it hasn’t seen since late 2016, but looks like it should find some support around $33 based on pivots in this price region two years ago. If that support is broken, however the stock could easily drop back into the mid-$20 price level.
- Near-term Keys: The best kind of short-term trading opportunity with this stock is on the bearish side right now; if the stock drops below $33 you should consider shorting the stock or buying put options with an eye on $25 to $26 as a near-term target price. A short-term bullish trade with call options or buying the stock is very aggressive right now. The value proposition at this level is terrific, which means that if you’re not afraid of holding a stock through whatever remains of its downward trend, there is already an opportunity to buy a fundamental strong stock with a nice dividend at an impressive bargain price.