As a pretty regular, retail investor, I have a lot of the same challenges most people do about tracking the stock market. Even though I do this for a living, I’m a busy guy, which means that paying attention to the entire market is hard, if not impossible to do. Like most smart investors, I’ve learned to keep a pretty consistent watchlist of stocks that I keep track of, and that I recycle through periodically to find new investing opportunities from among that group.
Watchlists are great tools for any investor, no matter what your preferred approach to the market is. Value, growth, short-term or long-term, keeping a basket of stocks at the ready that you can review quickly is a smart way to make sure that you can find ways to keep your money working for you.
I’m bringing this up right now because, even though market fear is getting higher and higher, and the Dow Jones yesterday managed to close a little below the -20% threshold that most analysts use to define a new bear market, the truth is that market corrections, and even bear markets, are generally healthy when you take a longer-term view of things. Let’s not overlook the reality that aside from a few, temporary drawdowns (the most recent in late 2018), the stock market’s bullish run from the end of the Great Recession has gone nearly uninterrupted for more than a decade. Let’s face it, we’ve been long overdue for an actual bear market for a long time.
Don’t get me wrong; I’m not actually saying that I think we’re heading into a recession. Despite the speed, slope, and general strength of the market’s declines since mid-February, the truth is that the economy is in better shape than a coronavirus-distorted view of reality might make you think. And even though I do think it’s true that the U.S. is going to feel an economic impact from the spread of a virus that as of this writing has more than 1,000 documented cases nationwide, and even prompted the NBA to suspend pro basketball games as of last night for the time being, most experts (scientific and otherwise) still appear convinced the disease’s actual impact is temporary rather than long-term. So it is likely to keep pressure on the stock market for the time being; but that effect is also just as likely to be temporary.
I think that if you want to be smart right now, you take a very careful, cautious approach about taking on any new positions. It might even be smart to not worry about buying anything right now, until we can start to see signs the market is starting to stabilize. At the same time, you should absolutely be looking for stocks that you think are going to be smart investments when the time comes.
Tyson Foods Inc. (TSN), is an example of what I mean. The stock is down almost -38% from a late December peak around $94 per share. Coronavirus has certainly played a role, as demand concerns from the outbreak of the virus in China, and subsequent quarantine of massive portions of that country’s population have put pressure on global protein demand. Even so, TSN’s fundamental profile suggests they have a great financial base to work from to ride out the storm and be ready to respond to increasing demand, not only in China but all over the world, as the effects of the virus ultimately abate. I’m not sure the stock is a great value right now, but if current bearish pressure continues, it should be soon, and that means that if you want to be smart, you should keep this stock in your watchlist.
Fundamental and Value Profile
Tyson Foods, Inc. is a food company, which is engaged in offering chicken, beef and pork, as well as prepared foods. The Company offers food products under Tyson, Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and State Fair brands. The Company operates through four segments: Chicken, Beef, Pork and Prepared Foods. It operates a vertically integrated chicken production process, which consists of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through its subsidiary, Cobb-Vantress, Inc. (Cobb), the Company is engaged in supplying poultry breeding stock across the world. It produces a range of fresh, frozen and refrigerated food products. Its products are marketed and sold by its sales staff to grocery retailers, grocery wholesalers, meat distributors, warehouse club stores and military commissaries, among others. TSN has a current market cap of $21.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings improved by 5%, while sales grew a little over 6%. In the last quarter, earnings increased by 37% while sales were flat, but slightly negative at -0.63%. TSN operates with a modest margin profile that appears to be strengthening; in the last twelve months, Net Income was 4.71% of Revenues and increased to 5.15% in the last quarter.
Free Cash Flow: TSN’ Free Cash Flow is generally healthy, at almost $1.3 billion. That number has decreased from about $1.9 billion in June of 2018. Its current level translates to a Free Cash Flow yield of about 5.61%.
Debt to Equity: TSN has a debt/equity ratio of .67, which is pretty conservative. Cash and liquid assets increased from about $170 million in June of 2018 to almost $500 million in the last quarter. The increase is a positive sign, but TSN also carries about $9.77 billion in long-term debt, which means that liquidity could be an issue in the event of a shortfall in company’s operating profits. For now, however for now their balance sheet indicates operating profits are more than sufficient to service their debt.
Dividend: TSN pays an annual dividend of $1.68 per share, which at its current price translates to a dividend yield of 2.68%. TSN’s dividend has also increased from $1.20 per share in late 2018.
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 $65 per share. That means the stock is a bit undervalued, with 11% upside from the its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line outlines the stock’s upward trend beginning in January of 2019 to its peak in early September. It also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock hit a high point at the beginning of September at around $94, but dropped back sharply from that point to the 38.2% Fibonacci retracement line at around $77 before pushing back to the 52-week high in early January. From that point, the stock’s momentum has reversed strongly, and has accelerated, pushing the stock within shouting distance of the December 2018 low it set at around $49 per share. Immediate resistance is around $63, based on pivot highs from August to October 2018, with support possibly around $55 based on the 88.6% Fibonacci retracement line.
Near-term Keys: The stock’s current bearish momentum means the near-term probability for TSN remains clearly on the bearish side. The slide is deep enough that I’m not sure there is any kind of immediate trade set up on the stock right now; but a break above $63 could offer an aggressive, speculative signal to buy the stock or work with call options with a profit target between $70 and $72 per share, based on the 50% Fibonacci retracement line. If the stock breaks below $55, you could consider shorting the stock or buying put options, as long as you plan to take profits around the $49 to $50 level on a bearish trade. The fundamentals are solid, and I do think the stock is going to test its multiyear low around $49, which is why I think TSN belongs in your watchlist. If it does, the value proposition is going to be very interesting, and that could be the time to start watching for signs of stabilization in the market and the globe so you can find a useful, value-based entry point.