While the market has been volatile amid worries on the trade front as well as in the political arena as impeachment rumors and speculation swirl, it does seem to be looking for yet another bullish foothold as we move into the end of the week. Yesterday President Trump tweeted that talks were progressing well and that he would be meeting with China’s Vice President today. Additional positive indications this morning have given the market even more reason to be enthusiastic, which means that the market is up about 2% as of this writing on the day.
I’m still pretty convinced that overall risk in the market is even more elevated right now than it has been in a very long time, and that is why I’m encouraging investors to be more cautious and conservative about taking on new positions; however, I think that positive developments – actual ones, not merely the latest series of upbeat tweets from the White House – on trade could give the market a catalyst to push the market higher, at least for the short term. That means that on a very selective basis, taking on new stocks can give investors opportunities to keep their money working for them.
Being selective in my book means avoiding positions in stocks at elevated valuations, and trading at or near historical highs for the most part. That’s especially true in the most economically sensitive sectors and industries, like Technology, including semiconductors. Consumer Discretionary stocks, including retailers and apparel makers, fit into that description in a very broad sense as well. The caveat for me is where the stock’s price is relative to current market highs as well as its own historical extremes.
PVH Corp (PVH) is a good example. The stock is currently about $20 above its 52-week low at around $67, but is still almost -50% below its own highs, set in May of 2017. From that point, the stock has followed a very extended downward trend, but appears poised to break that trend in a meaningful way. Backed up by solid fundamentals, the stock’s value proposition is nearly equal to its discount from that 2017 high. That’s why an actual trade deal could make a company like PVH a big near-term winner.
Fundamental and Value Profile
PVH Corp. is an apparel company. The Company operates through three segments: Calvin Klein, which consists of the Calvin Klein North America and Calvin Klein International segments; Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments, and Heritage Brands, which consists of the Heritage Brands Wholesale and Heritage Brands Retail segments. The Company’s brand portfolio consists of various brand names, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner’s, Olga and Eagle, which are owned, and Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection and Chaps, which are licensed, as well as various other licensed and private label brands. The Company designs and markets dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products and handbags, footwear and other related products. PVH has a current market cap of $6.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased about -3.5%, while sales were mostly flat, but positive by 1.31%. In the last quarter, earnings declined nearly -14.5%, while revenues were basically flat. The company’s margin profile, however shows signs of strength; over the last twelve months, Net Income was 6.96% of Revenues and improved to 8.18% in the last quarter.
Free Cash Flow: PVH’s Free Cash Flow is healthy, at $553 million. This is a number that has improved from a little more than $372 million in the final quarter of 2018, and that translates to Free Cash Flow Yield of 9.02%.
Debt to Equity: PVH has a debt/equity ratio of .73, which is a pretty conservative number. Their balance sheet shows $433.5 million in cash and liquid assets against $4.27 billion of long-term debt. Both of these numbers have increased – cash from a little more than $400 million at the end of 2018, and debt more alarmingly from $2.9 billion since the end of the first quarter of 2019. Their solid, improving margin profile, combined with their healthy cash flow means that servicing their debt isn’t a problem.
Dividend: PVH pays an annual dividend of $.15 per share, which translates to a minimal dividend yield of just .18%. The stock’s dividend is not a defining reason to own the stock, but it is noteworthy that the stock pays a dividend, in an industry where most companies do not.
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 PVH is $79.19 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.05. Their historical average is 1.67, which means the stock is undervalued by about 51%, and provides a good reference for the stock’s long-term potential upside, which is at about $132 per share.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the last two years of stock performance for PVH. From its all-time high at nearly $170 in June of last year to its low around $67 in late August, the stock dropped more than $100 per share. From that point, however, the stock has picked up some nice, positive momentum, hitting a short-term peak at $90 in early September before dropping back a bit to a new, higher low at around $80 per share. As of this writing, the stock is about $2.50 below its $90 peak; a break above that resistance point could give the stock room to run to anywhere between $100 to $106, which is where the 38.2% Fibonacci retracement line current sits. If the stock breaks down and drops below support at $80, it drop quickly to $75 or possibly even test its low at around $68 per share.
Near-term Keys: If the stock can keep up its current, mostly bullish momentum, and break above $90, there is a strong signal to consider buying the stock or working with call options with a target price at around $100 as a near-term profit target. If the stock starts to break down, wait for a drop below $80 to act as a signal to short the stock or work with put options with an eye on $75 as a quick profit target, and possibly as low as $68 if bearish momentum remains strong.
By the way, if you liked this article, you'll LOVE this Meaty free training I just published on the top 3 questions and challenges every investor faces AND how to overcome them. It's titled "10k into $2.4 Million in 18 months" and you can grab it for free here