With so much in constant flux about the financial markets and the health of the global economy, it can be a challenge to know how to best position yourself as an investor. It doesn’t really help to know that there are tens of thousands of available stocks to choose from, each of which can be used in a number of different ways. Add in the possibilities that come with equity options, and the possibilities are literally endless about how you can use market conditions at any given time to put your money to work for you.
I usually think of that abundance of possibility as a positive thing – but it’s also one of the things that can make things harder for most investors. Where do you start? What approach works best for today’s market conditions? There is so much information out there that it seems like unless you are a full-time investor or student of the market, you’ll never be able to make sense of it all. That’s certainly the spin mutual fund companies and financial advisors put on the market – but I just don’t buy it.
The longer I’ve studied and been involved with the markets, the more I’ve found myself gravitating to methods that help me keep things simple, while at the same time emphasizing an active approach to the investments I make. An active approach means paying attention to broad market conditions, and being willing to work with and manage trades on individual stocks rather than following passive strategies like index funds. In this context, keeping things simple means, at least in part, that instead of actively trying to track the entire market, I usually focus on a pretty select basket of stocks that I find myself coming back to on a pretty regular basis. They’re the stocks that make up the watchlist I like to review each day, and while I occasionally add to or take away from that list, the fact that a lot of the stocks in that list have been there for a long time means that I’ve been tracking data and activity in those stocks – and the company’s underlying business – for a fairly long time.
Westrock Company (WRK) is a good example of the kind of stock I’m referring to. This is a company that I’ve followed for a couple of years. It occupies an interesting niche in the Materials sector, providing paper and packaging solutions for consumer and corrugated packaging markets. That doesn’t sound very glamorous – but it means that the cardboard boxes, paperboard, and merchandising display materials you see on products you use every day, or in grocery and department store are, in many cases coming from this company. Despite a generally solid fundamental profile, the stock price suffered for a couple of years before it finally began to rebound in late 2019. COVID-19 and the consequent economic pressures that emerged last year, and still persist today have certainly played their role in the stock’s price performance; they drove the stock to visit lows in the mid-to-low $20 range on two occasions since the stock hit its bear market bottom in mid-March 2020. WRK finally started picking up some bullish momentum in August and from that point formed an impressive, intermediate-term upward trend that found its last top in early January of this year at around $48. I also think the fact, while that their bottom line has been impacted by the economic slowdown caused by COVID-19, their most recent earnings reports suggest that they’re holding up remarkably well. The stock price has faded back a bit, retracing a little more than -10% from that high point. Along with a generally solid fundamental profile, that pullback could translates to a very attractive value proposition and opportunity to buy a good company at a price that is still pretty nice. Let’s check it out.
Fundamental and Value Profile
WestRock Company, incorporated on March 6, 2015, is a multinational provider of paper and packaging solutions for consumer and corrugated packaging markets. The Company also develops real estate in the Charleston, South Carolina region. The Company’s segments include Corrugated Packaging, Consumer Packaging, and Land and Development. The Corrugated Packaging segment consists of its containerboard mill and corrugated packaging operations, as well as its recycling operations. The Consumer Packaging segment consists of consumer mills, folding carton, beverage, merchandising displays, and partition operations. The Land and Development segment is engaged in the development and sale of real estate primarily in Charleston, South Carolina. WRK has a current market cap of $11.2 billion.
Earnings and Sales Growth: Over the past year, earnings grew by 5.17%, while sales were mostly flat but negative, by -0.5%. In the last quarter, earnings declined by -16.4%, while sales dropped about -1.57%. WRK operates with a margin profile that over the last year shows a clear impact of pandemic-induced restrictions and slowdowns; Net Income as a percentage of Revenues was -3.29%, but saw a material improvement in the last quarter to 3.45%. Along with the company’s Free Cash Flow, I think this is a sign the company is turning the corner on a tough year, with better things to come.
Free Cash Flow: WRK’s Free Cash Flow is healthy, at $1.6 billion, and which translates to an attractive Free Cash Flow Yield of 14.81%. This number also improved throughout the course of the past year; at the beginning of 2020, Free Cash Flow was $919.2 million and increased modestly tp $1.03 billion by mid-year and $1.13 billion in the last quarter. The sizable increase from the third to the fourth quarter of 2020 is a good indication of improving cash flow, offering a useful counter to the troublesome Net Income pattern I just described
Debt to Equity: WRK has a debt/equity ratio of .80, which is generally conservative but has increased since November 2018 from just .49. The company doesn’t have great liquidity, with cash and liquid assets of about $254 billion versus $8.77 billion in long-term debt. It should also be noted that the largest portion of their long-term debt is tied to the November 2018 acquisition of KapStone Paper & Packaging. WRK’s operating profile suggests that servicing their debt should not be a problem.
Dividend: WRK pays an annual dividend of $.80 per share, which at its current price translates to a dividend yield of about 1.93%. Management cut the dividend in mid-2020 from about $1.80 per share annually to help preserve cash; however I think it is worth noting the company did not eliminate its dividend, which many other stocks have done in response to pandemic-related pressures.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, Fair Value target around $48.50 per share. That means that the stock is undervalued by about 15% from its current price. That is interesting, if not quite compelling, and reflects the strength of the stock’s upward trend through the end of 2020. It is also worth noting that around June of last year, my Fair Value target for this stock was around $41 – nearly -15.5% below where it is now.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line marks the stock’s upward trend from March 2020 to the beginning of this year; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From the top of that trend at around $48, the stock has faded back to its current level a little above $42 per share, where it appears to be finding a good level of current support between $41 and $40. Immediate resistance is around $44 based on pivot activity in December in that price area; a push above that level should give the stock room to test its 52-week high around $48. A drop below $40 should find next support a little below $38 where the 38.2% retracement line sits, with additional downside to around $34.50 if bearish momentum accelerates.
Near-term Keys: WRK has a solid fundamental profile and a useful value proposition that I think makes this a smart stock that long-term investors shouldn’t ignore; the stock’s upward trend since August should also help provide a springboard for the stock to use this latest pullback to rebound nicely if it can pivot off of its current support level. Keep in mind, this is a long-term view, and includes the reality that in the near-term, the stock could continue to be somewhat volatile. Buying this stock should be seen as a bet on the company’s long-term growth prospects looking into the remainder 2021 and beyond. If you prefer to work with short-term trading strategies, you could use a pivot off of current support around $41 as a signal to think about buying the stock or working with call options, with an eye on $44 as a useful bullish target. A drop below $40, on the other hand could be an interesting signal to think about shorting the stock or buying put options, using next support around $38 as a quick-hit target on a bearish trade.