As the market, and economy moves into an expected, but unprecedented eleventh year of its bullish trend, a big question I see a lot of smart investors asking right now is what the right approach to take to the market is. With most economic indicators showing signs of continued strength, trade progress expected to reduce escalating costs and foreign risk exposure due to tariffs, and ongoing, accommodative interest rate policy in place, it’s pretty easy to be optimistic; that’s why I think a lot of analysts are expecting the market to keep going up in 2020.
While I think it is entirely possible to see the market extend its long upward trend even further in the near future, I also find the contrarian side of my experience and education urging a measure of caution. It’s true that the longer a trend lasts – in any direction – the more likely it becomes to reverse. No bull market lasts forever, just as every bear market eventually gives way to recovery and a new bull market. That means that a smart investor looks for ways to stay in the game while the market offers useful new opportunities, while also implementing plans to minimize and mitigate downside risk as much as possible.
Dividend-paying stocks, in my book, are a really useful way to keep the market working for you, even when you think the market could reverse to the downside. Why? Companies that pay a consistent, annual dividend are the exception in the stock market, rather than the rule; that means they factor dividend payments into their balance sheet, which requires a firm grasp of how their business works, and how to manage their corporate governance around maintaining that dividend. It doesn’t mean their stock won’t go down in a bear market; but since these are stocks that generally operate on a higher level of business efficiency and shareholder accountability, they are stocks that income investors often gravitate to more as market conditions become more uncertain. That’s one of the reasons that over the past year I’ve seen more and more analysts and talking heads including dividend stocks in their recommendations. If you can find a strong dividend-paying company that is also trading at a significant discount to its most recent highs, then you could be looking at a compelling trifecta: dividend income, fundamental strength, and strong value.
CVR Energy Inc. (CVI) is a good example of the kind of dividend-paying stock I’m referring to. Since hitting a high around $56 in July of this year, the stock has dropped almost -27% to its current level around $40 per share. This is a stock that offers an above-average dividend, with a solid fundamental profile, and adds in to the mix a compelling value-based argument. Let’s dive in to the numbers to see why I think you should pay attention to this stock in the months ahead.
Fundamental and Value Profile
CVR Energy, Inc. (CVR Energy) is a holding company. The Company is engaged in the petroleum refining and nitrogen fertilizer manufacturing through its holdings in CVR Refining LP (CVR Refining or the Refining Partnership) and CVR Partners LP (CVR Partners or the Nitrogen Fertilizer Partnership). It operates under two business segments: petroleum (the petroleum and related businesses operated by the Refining Partnership) and nitrogen fertilizer (the nitrogen fertilizer business operated by the Nitrogen Fertilizer Partnership). The Company’s Refining Partnership is an independent petroleum refiner and marketer of transportation fuels. Its Nitrogen Fertilizer Partnership produces and markets nitrogen fertilizers in the form of urea and ammonium nitrate (UAN) and ammonia. The petroleum business consists of a coking medium-sour crude oil refinery in Coffeyville, Kansas and a crude oil refinery in Wynnewood, Oklahoma. CVI’s current market cap is $4.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings by a little over 24% while sales decreased -16. In the last quarter, earnings were 1.7% higher while sales dropped by -3.85%. The company operates with a margin profile that is showing signs of strength; over the last twelve months, Net Income was 6.75% of Revenues over the past year and about 7.38% in the last quarter.
Free Cash Flow: CVI’s free cash flow is healthy, at $671 million. That marks an increase from March of 2018 from -$59.9 million and also translates to an attractive Free Cash Flow Yield of 16.5%.
Debt to Equity: CVI has a debt/equity ratio of .69. This is a low number that generally suggests debt management shouldn’t be a problem. The company’s balance sheet shows $692 million in cash and liquid assets against about $1.19 billion in long-term debt. CVI’s operating profile indicates that operating profits are more than adequate to service their debt, with good liquidity to further bolster their financial flexibility.
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 CVI is $17.16 per share, and which translates to a Price/Book ratio of 2.35. Their average Price/Book Value ratio is 3.34, which means the stock is undervalued by almost 42%. That puts a long-term “fair value” price for the stock above $57.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above shows the last year’s worth of price movement for CVI. The red diagonal line marks the stock’s upward trend from January to late July; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From its peak, the stock dropped back to a low point at around $39, which also marks the stock’s closest current support level. Resistance is around the 61.8% Fibonacci retracement line at $43.50. A break above resistance should give the stock room to run to around $48 per share where the 38.2% retracement line sits, while a drop below support should lead the stock to test its January low around $36.
Near-term Keys: There could be some useful, short-term, momentum-based opportunities in the stock. A break above $95 would be an excellent signal for a bullish, momentum-based trade, by either buying the stock outright or working with call options. If the stock pushes below $92, there could be a good short-term opportunity to short the stock or work with put options. From a value-oriented standpoint, the stock really doesn’t offer a great value unless it drops back below $70; at around $69, it would mark a significant discount to its historical Price/Book ratio. Without that discount, even with the stock’s generally solid fundamental profile and excellent dividend, it’s hard to forecast much more long-term upside than its current price level.