One of the most interesting things to me about the stock market is that there really are as many different ways to invest your money as the human brain can imagine. That’s one of the reasons that there are so many different kinds of mutual fund and ETF choices geared for the average investor. One of the reasons that is so interesting is because that reflects another market reality: everybody has their own opinion about how the market works, and where the best opportunities lie at any given time. Think the market is going to go down? You’ll be able to find a multitude of investment vehicles that are specifically designed to profit when the market drops in value. Think it’s going to go sideways? No problem – there are a bunch of choices you can work with there, too.
I learned a long time ago that there is no such thing as a perfect investing system that is going to work the same way for everybody. What might be really effective for me, for example, might not work at all for the guy down the street from me. The reason why is simple: being different people means that we interpret, and act information in different ways. It’s also not a given that we are both trying to accomplish the same goal in the investments we make.
I decided a long time ago that relying on fundamental analysis, together with a focus on identifying undervalued stocks, represented the best way for me to make smart choices about the investments that I make. During the high-growth stages of a bull market, that method tends to lag the market, which is one of the reasons it doesn’t get a lot of attention when things are going great. The focus shifts instead to stocks that are doubling or even tripling in value, and just about all the experts on popular media usually want to talk about is why those stocks should keep going up. The strength of the long-term trends of those stocks draws a lot of investors in, because it’s easy to believe that the stock should keep going up, simply because it has been doing it for so long.
Ross Stores, Inc. (ROST) is a really good example of what I mean. If you bought this stock ten years ago and still held it today, you would be looking at incredible gain today. In the midst of the last bear market, the stock bottomed in late 2008 at $5.53 per share. If you bought 1,000 shares then – at a cost at the time of $5,530 – as of yesterday’s close, you would be sitting on a small fortune of $96,630. When you hear Jim Cramer talk about home runs, ROST is one of the biggest home runs of this bull market, with a total gain of nearly 1,650% over the last ten years!
Like the rest of the market, ROST is below its most recent highs, as concerns about everything from interest rates to trade wars have really started to rattle investors; but even with a big increase in volatility over the last week, the stock is still less than 3% off of the all-time high it reached in late September. Does that current resilience mean this stock should continue to hold up if the broad market continues to turn lower? I’m not so sure. This is a stock with some terrific fundamentals behind it, but it shouldn’t be too surprising to see me say that it isn’t a good value play right now. Considering the pressure the market is coming under right now from trade war worries, I think that there might not be as much potential downside in this stock than in some others, based on the valuation measurements I like to focus on; however the stock’s price action, and its extremely extended long-term trend, certainly to point to an ever-increasing level of risk exposure in the event of downward trend reversal.
Fundamental and Value Profile
Ross Stores, Inc. and its subsidiaries operate two brands of off-price retail apparel and home fashion stores-Ross Dress for Less (Ross) and dd’s DISCOUNTS. The Company is the off-price apparel and home fashion chain in the United States, with 1,340 locations in 36 states, the District of Columbia and Guam, as of January 28, 2017. The Company offers in-season, name brand and designer apparel, accessories, footwear, and home fashions for the entire family at savings of 20% to 60% off department and specialty store regular prices every day. The Company also operated 193 dd’s DISCOUNTS stores in 15 states as of January 28, 2017. As of January 28, 2017, the Company operated a total of 1,533 stores consisted of 1,340 Ross stores and 193 dd’s DISCOUNTS stores. As of January 28, 2017, the Company owned and operated six distribution processing facilities-three in California, one in Pennsylvania, and two in South Carolina. ROST’s current market cap is $1.1 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased almost 27%, while sales growth saw an increase of about 9%. The picture has gotten less favorable in the last quarter, where earnings decreased more than 6%, while sales increased 4.1%. The stock operates with a pretty healthy margin profile; over the last twelve months, Net Income was a little more than 10% of Revenues; it is also consistent, as this number is nearly identical in the last quarter.
- Free Cash Flow: ROST’s free cash flow is healthy, at more than $1.5 billion over the last twelve months. This is also a number that has increased steadily for the past 5 years from just a little $400 million in late 2013.
- Debt to Equity: ROST has a debt/equity ratio of .10, which is very low and impressive for a company in the Consumer Discretionary space. Their balance sheet also shows that cash and liquid assets are more than quadruple that company’s long-term debt load.
- Dividend: ROST pays an annual dividend of $.90 per share, which translates to a yield of .93% 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 ROST is $8.53 per share and translates to a Price/Book ratio of 11.32 at the stock’s current price. By itself, that should give pause to even a growth investor, since that is a very high Price/Book multiple, even in this stock’s industry and sector. Their historical Price/Book average is 9.38, which suggests that the stock is trading at a premium right now of about 17%. Their Price/Cash Flow ratio offers a supporting perspective, since it is currently running about 26% above its historical average. Between the two measurements, the long-term target price, based strictly off of value analysis could lie in the $71 to $80 range.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The chart above traces the stock’s long-term upward trend to its high late last month a little $100 per share. The red line also provides the basis for the Fibonacci retracement lines shown on the right side of the chat. So far this month, the stock has shown some resilience around $95, and if the broad market can find some bullish momentum, could set up for a new push to test that all-time high and possibly set up another one. If, however the stock breaks below $95 and reaches $94.50, don’t be surprised to see the stock drop quickly to as low as the $86 where the 38.2% retracement line sits, or even to around $80 in the area of the 50% retracement level.
- Near-term Keys: The technical picture for this stock really falls into line with the value analysis I outlined above. The highest probability opportunity in this stock right now lies in the downside; there really is very little to justify either a long-term bullish view of the stock right now, or to even signal a good short-term bullish trade. The best idea is to wait to see if the stock drops below $95 as I just mentioned; if it does, give serious consideration to shorting the stock or buying put options.