Any experienced investor, no matter what their investment philosophy is, will undoubtedly tell you that one of the most useful ways they keep track of new opportunities as they come up is by maintaining a watchlist of stocks that they can check on a regular basis. A good, diversified list of stocks in a variety of different industries can be an effective way to keep your investing functional, no matter what the ebb and flow of market sentiment is doing at any given time, since as one industry may be moving out of favor with investors, another will undoubtedly be moving into favor.
As a value-oriented investor, I actually get a little more interested when I see stocks falling out of favor with the broad market. Institutional rotation away from a sector usually means that there is a lot of money getting pulled out of stocks in a certain sector of the market, and so that usually puts a lot of pressure on just about everything related to that sector. That creates downward trends and bargain pricing levels, even for the biggest players in those industries that I can take advantage of.
One of the challenges comes at the point when market uncertainty and fear leads to mounting selling pressure – enough that the market begins to turn from bad to worse. The weekend may have provided that tipping point. As coronavirus fears increase, the collapse of negotiations between OPEC and Russia on oil production cuts prompted Saudi Arabia to diverge from the entire cartel, increasing an already oversupplied market and pushing raw crude prices below $35 per barrel for both WTI and Brent products. In reaction, global stock markets sold off, with the New York Stock Exchange triggering the first set of “circuit breaker” measures in the first few minutes of trading this morning to blunt the frenzy and give traders time to absorb information and plan their next steps. The drop is big enough to push the major indices near to the bottom of a correction and near bear market levels.
Stocks with a direct, or even indirect relationship to oil prices have been pummeled. That includes stocks like Eastman Chemical Co. (EMN), one of the biggest companies in the Chemicals industry. From a June 2018 high around $109, the stock has plunged to a multiyear low around $53 per share. The selloff has accelerated in the last month, with the stock dropping almost -22% in that time. Is this a good time to take advantage of the stock’s massive discount, or is it simply an indication that the worst is still ahead? Let’s let the stock’s fundamentals numbers shed a little light.
Fundamental and Value Profile
Eastman Chemical Company (Eastman) is an advanced materials and specialty additives company. The Company’s segments include Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. In the AFP segment, it manufactures chemicals for products in the coatings, tires, consumables, building and construction, industrial applications, including solar energy markets, animal nutrition, care chemicals, crop protection, and energy markets. In the AM segment, it produces and markets its polymers, films, and plastics with differentiated performance properties for end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support its specialty operating segments. Its product lines in Fibers segment include Acetate Tow, Acetate Yarn and Acetyl Chemical Products. EMN’s current market cap is $7.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased a little more than 2% while revenues dropped about -7.2%. Those numbers dropped even more in the last quarter; earnings declined nearly -28% while sales were down -5.1%. The company’s margin profile has narrowed significantly, and is a big source of concern. Net Income for the last twelve months was a healthy 8.18% of Revenues, but dropped to just 1.18% in the most recent quarter.
Free Cash Flow: EMN’s free cash flow is healthy, at $1.08 million. This is a number that has increased significantly since 2017, from about $650 million, and translates to a Free Cash Flow yield of nearly 14%.
Debt to Equity: EMN has a debt/equity ratio of .93, implying they use a fair amount of debt, but is generally manageable. The company’s balance sheet indicates their operating profits are more than adequate to service their debt for the time being, however liquidity could be a concern moving forward – especially if Net Income doesn’t improve. Their balance sheet shows $204 million in cash and liquid assets versus about $5.6 billion in long-term debt.
Dividend: EMN pays an annual dividend of $2.64 per share, which translates to a yield of about 4.57% at the stock’s current price.
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 above $84 per share. That means the stock is trading at a massive discount, with 61% upside from the stock’s 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 traces the stock’s downward trend from April 2019 to its current price; it also provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock’s decline over the past month only appears to be accelerating, meaning that sentiment is clearly on the bearish side. Despite the current momentum, the stock appears to have at least temporary support around $51; however a drop below that level could see it slide further, to a low around $45 that was last seen in June of 2012. A pivot and bounce off of $51 could give the stock room to rally to about $62, marked by a pivot low in August of 2019.
Near-term Keys: The value proposition right now for EMN is very attractive, but I think the market’s current momentum, combined with big concerns about the company’s narrowing operating profile are sufficient to suggest that the downside could be even deeper for this stock right now. That means that best trades lie in the short-term. If the stock drops below $51, take it as a signal to consider shorting the stock or buying put options, with an eye on $45 as a near-term profit target. If the stock can stabilize, and start to show bullish momentum, there is near-term upside above $60, which could be an interesting, aggressive signal to think about buying the stock or working with call options. Otherwise, keep your powder dry; wait for the stock to show signs of price stabilization and improving fundamentals before taking a long-term buying opportunity seriously.