Despite today's downgrade from "buy" to "hold" by A.G. Edwards (point "B"), I still view the recent weakness in shares of Abercrombie and Fitch (ANF) as an excellent entry point for investors. As you can see from the chart below, A.G. has hardly been adept at calling the direction of ANF stock. They put the "buy" recommendation on it in June 2005 (point "A") and within weeks the shares began a freefall from over $70 to under $45 in less than two months. If I'm right that Abercrombie will rebound later this year, this will be just another example of analysts urging clients to buy high and sell low.
WSJ Exposure and a Stock Pick
Thanks to Kevin Delaney and the rest of the team at The Wall Street Journal for featuring me yesterday in a front page story about my trading in and views on Google (GOOG). It certainly made for a fun and eventful day, most notably a full inbox and a phone ringing off the hook. If you would like to read the story, it can be accessed through wsj.com in addition to March 2nd's hard copy. I also have an electronic copy if you aren't a WSJ online subcriber, so email me if you'd like a copy.
On to the market. I have been pleasantly surprised how well the market is acting so far this year. I am tempted to take some money off the table, but the momentum is clearly strong right now. Hopefully nothing will get in the way of that. What do readers think? Feel free to comment.
As for specific stocks, I would suggest investors take a look at Abercrombie and Fitch (ANF). The stock was down $6 yesterday after weaker-than-expected same store sales for February. A lot of hot money was in the stock, so the decline may have been more than normal. Keep in mind that SSS were still up more than 5% for the month, and February is the second least important month of the year for retailers. The stock looks very cheap down here under $60 per share.
Urban Jumps 12% on Analyst Comments
Two weeks ago I wrote that Urban Outfitters (URBN) looked like it was bottoming at $25 and change, given that it was oversold and yet was holding a heavy support level around $24.44-$24.45 per share. The next week, on January 4th, the stock closed at $24.48 and never went any lower.
Today we have a couple of positive analyst reports pushing the stock up more than $3, or 12 percent, to $28 and change. Traders can take their $3 and run, but I would not be surprised if we see $30 this month.
Another Entry Point for URBN
At the beginning of the year I highlighted shares of Urban Outfitters (URBN) as an attractive growth play for investors. Followers of that advice saw the stock rise from the low 20's to the low 30's over the course of 2005. However, recent weakness in retail stocks has caused a pullback in URBN and for those who have yet to take a position in the company, there is an opportunity here, I believe.
Not only are the fundamentals strong, but the technicals look good as well. Readers of this blog know I don't use charts to pick stocks, but when a company I like fundamentally also has a good chart pattern, it's usually a good entry point.
Here's a second version of the chart, in response to the reader's comment:
Sears Canada to Pay $1.7B Dividend
Shares of Sears Holdings (SHLD) are getting a boost in late day trading today after Sears Canada announced it would distribute the majority of proceeds from the sale of its credit card division to shareholders in the form of special dividends. Sears Holdings owns 54% of the Canadian division, and stands to net more than $900 million in cash from the payout. This is another windfall for Eddie Lampert to allocate profitably for shareholders that Wall Street isn't really focusing on.
American Eagle Goes On Sale
Shares of young adult apparel chain American Eagle Outfitters (AEOS) are down $2 in after hours trading to $20.75 per share. The company reduced its fourth quarter earnings guidance tonight from 74 cents to 71 cents. That would put 2005 earnings at $1.90 for the year. A three-cent trimming of estimates does not warrant a nearly 10% dicing of the stock, mostly due to its already meager valuation.
If AEOS can hit $1.90 for the year ending in January, the shares will be trading at only 11 times trailing EPS in February should the current $20.75 price hold. For a company with a pristine balance sheet that can grow earnings 8%-10% annually for the next three to five years, that's insanely cheap.
Peridot Not Alone In Buying Sears
Late Friday Sears Holdings (SHLD) announced that its board has authorized a $500 million stock buyback program. You may recall the company did the same thing exactly a month ago on September 14th. In today's press release, Sears said they have bought back $434 million of that inital amount in the last month, at an average price of $118.86 per share.
This announcement brings the total amount of the buyback to $1 billion, or roughly 5% of the company's outstanding shares, and could be completed within 60 days, start to finish. Based on these numbers, earnings per share for Sears in 2006 will be increased by nearly $0.40 per share.
Amazingly, the stock still goes down pretty much every day, and trades below the prices Sears has been paying recently. Investors won't be able to come back a year or two from now and say they didn't have a great chance to get in, that's for sure.
Fossil: Back from the Dead?
There are certain companies that seem to have a huge profit miss and a resulting stock price catastrophe every so often. Fossil (FOSL) is a perfect example. This company is used to seeing its equity get crushed every few quarters. Investors who are willing to pounce can get a terrific price and wait for a rebound to sell for a nice profit.
Fossil, a leading maker of watches, once again has seen its stock drop from a 52-week high of $32 all the way down to below $20 per share, for a haircut of about 40 percent. Estimates for 2006 earnings are nearing $1.50 and the company has almost $2 per share in net cash on its balance sheet. The result is an enterprise value-to-earnings ratio of only 12x for a company that is growing double digits.
This most likely isn't a stock that investors should buy today and hold for 3 to 5 years, given its history of putting together a few good quarters and then giving back the gains. Nonetheless, buying at these levels should give investors some upside as the company delivers on reduced expectations. When should FOSL be sold? I think a rebound of 25 percent is in the cards, so Fossil could see at least $25 per share in the next 6 to 9 months.
The Math Behind a Bullish Call on Sears
With the stock of Sears Holdings (SHLD) down 25 percent from its high, concerns are mounting, good news goes unnoticed, and sentiment has waned. Why then am I still bullish? Why is this the third time I've mentioned SHLD this month? Don't worry, in the days and weeks ahead I will try to move on from talk of Google, Sears, and the airlines and explore some new companies.
Let me throw some numbers out there that show why I feel SHLD shares at $120 are a steal. After this, I'll try and stop talking about it so much. Current estimates for 2006 call for Sears to earn $7.88 per share on $56 billion in sales. This equates to a 2.3% net profit margin. I happen to think this margin projection is too low. The way I see it, the best two comparables for Sears are J.C. Penney (JCP) and Federated (FD). After all, the Sears model is moving toward Sears and the newly created Sears Essentials stores, which very much will be traditional department stores.
Now, let's look at consensus estimates for JCP and FD. For next year, JCP is expected to earn $4 on $19.5 billion in sales, with FD slated to make more than $5 per share on $16.6 billion. Both of these estimates come out to a 5 percent net margin. Call me optimistic, but I think the turnaround at Sears should net margins very close to JCP and FD. There is no reason to think a solid management team cannot attain department-store-like margins.
It is possible that Kmart was so screwed up that it is beyond repair, at least to get to the same level of profitability as these other stores. For sake of being conservative, I'm going to assume SHLD can get to a 3% profit margin by the end of 2006. Since the Sears model is going to be to sacrifice sales in order to boost profits, I'm going to combine my 3% margin estimate with $55 billion in annual sales, one billion dollars less than analysts currently expect. All of the sudden, SHLD is earning $1.65 billion per year, which makes for an easy calculation with 165 million shares outstanding; that's $10 per share in earnings.
At $120 per share, the stock is only 12 times these profit estimates. And remember, this model does not include the $900 million cash Sears will get from Sears Canada, the $500 stock buyback program recently announced, or any real estate sales of any kind. There is a lot of upside here, and while it is by no means assured, given the recent negative sentiment and a 25 percent drop in the share price, SHLD looks very attractive. Just imagine if SHLD can ever get to a 5 percent margin, that would get us to nearly $17 per share in EPS. Put a market P/E on that and you get a stock price of $250.
Sears Buyback & Bear Stearns Incompetence
After recommending investors buy Northwest Airlines (NWAC) stock at $5.00 less than a month ago, today Bear Stearns downgraded the stock to a sell, after yesterday's bankruptcy rumors sent the stock down as much as 60 percent to $1.57 per share. Amazingly (well, maybe not given this analyst's track record) NWAC stock is up 25 percent today as some investors bet Northwest will temporarily avoid filing Chapter 11 this week by using that possibility to reach an agreement with its mechanics on wage concessions. It would be hilarious if Bear's sell call marked the bottom in NWAC and the stock actually rose significantly after news of a deal. At that point, Bear would probably upgrade the stock just in time for the company to file bankruptcy.
Although the stock isn't really reacting to the news, Sears Holdings (SHLD) today announced a $500 million stock repurchase plan. This represents 2.3% of the company's total shares outstanding. These are the kinds of things SHLD management will do to enhance shareholder value through the use of its free cash flow. They will not use the money to mimic other retailers that open new stores. Rather they will try and increase the profitability of existing stores and use that money to boost the stock price.