TJX could still be an interesting reopening investment

I write a lot about value investing in this space; each day, I like to try to to identify areas of the market where I think good value lies, as well as where some significant investment risks lie. If you listen to a lot of talking heads on TV, when a popular, well-known stock starts to drop in price, you’ll almost always start hearing about what a great deal the stock is at that price, and how you should “buy the dip” to take advantage of the next swing upward. For a lot of stocks in the market for the last several years, that approach has yielded some big returns because the broad market’s upward trend has been so strong; but for a large number of the stocks, diving into the actual fundamentals and critical measurements of what a company is actually worth, the truth is actually different than what those talking heads would have you believe.

I differ from talking heads, because I’m not trying to get attention with the latest sound bite; more often than not, I think the real objective they have is to keep you watching their programs rather than giving you actual, useful and unbiased information. The easiest way to keep people glued to the television is to talk about the areas of the market that everybody is paying attention to anyway. If there’s one thing that the market has consistently proven over time to hate, it’s change, which means that the longer the talking heads can keep people buying into the status quo, the better off they – and the media that employs them – are going to be.

I’m more interested in being a functional investor than anything else; that also means that when I write about the market, it’s important to me that the things I write about help other people to make better, more educated decisions about the investments they make. You don’t have to agree with me, but if I can give you some extra food for thought, and help you consider the risk versus reward of an investment you’re considering more carefully and effectively, then I’ve accomplished my objective.

Value investing, at its core, is really about trying to identify stocks that are available right now at prices that are significantly lower than what their business is actually worth. Warren Buffet, the Oracle of Omaha and perhaps the most famous living value investor in the world, likes to call value investing “buying a good company at a nice price.” That’s an interesting description, and perhaps that’s why I’ve always thought about value investing like digging through the clearance rack at a department store. You’ll probably pass over the vast majority of items you actually look at, or sometimes not get anything at all; but if you find one item on that rack you like, you’ll probably feel pretty good about it, because you will have been able to buy it at a much better price than full retail value.

In the retail industry, there is an entire sub-industry built on this same premise. You probably already know about a lot of the stocks that make up this industry, or at least I’m willing to bet that you’ve spent a little bit of time in some of their stores, like TJ Maxx for TJX Companies (TJX), Ross Stores (ROST), and Burlington Coat Factory for Burlington Stores (BURL). TJX in particular is an interesting story as the entire investing world continues to look ahead, past the pandemic and to focus on stocks that could represent good “reopening” opportunities. TJX survived the worst of 2020 better than most companies in the industry, primarily by virtue of its “fortress”-level balance sheet, with cash and liquid assets well above its debt obligations. The stock has also dropped about -10% from its 52-week since early May. That might provide an interesting opportunity to buy this good company at a nice price.

Fundamental and Value Profile

The TJX Companies, Inc. (TJX) is an off-price apparel and home fashions retailer in the United States and across the world. The Company operates through four segments: Marmaxx, HomeGoods, TJX Canada and TJX International. T.J. Maxx and Marshalls chains in the United States were collectively the off-price retailer in the United States with a total of 2,221 stores, as of January 28, 2017. The HomeGoods chain was an off-price retailer of home fashions in the United States with 579 stores. The TJX Canada segment operates the Winners, HomeSense and Marshalls chains in Canada. Winners is the off-price apparel and home fashions retailer in Canada. HomeSense offers home fashions off-price concept in Canada. The TJX International segment operates the T.K. Maxx and HomeSense chains in Europe. With 503 stores, T.K. Maxx operated in the United Kingdom, Ireland, Germany, Poland, Austria and the Netherlands.

Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 159%, while sales increased almost 129%. In the last quarter, earnings declined -12% while sales dropped almost -9%. TJX operates with a narrow margin profile; over the last twelve months, with Net Income that was 4.07% of Revenues, and strengthened in the last quarter to 5.3% of Revenues.

Free Cash Flow: TJX’ free cash flow for the trailing twelve months is healthy, at a little more than $6.7 billion. That translates to a Free Cash Flow Yield of 8.24%.

Debt to Equity: TJX has a debt/equity ratio of .87. This is a conservative number that reflects a conservative approach to leverage. The company’s balance sheet is a particular source of strength, with $8.77 billion in cash and equivalents against about $5.33 billion in long-term debt.

Dividend: TJX pays an annualized dividend of $1.04 per share, which translates to a yield of 1.55% 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 a little above $77 per share. That suggests that the stock is undervalued right now, with about 15% upside from its current price, and an especially useful discount price at around $62 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s upward trend from a low in November of last year at around $50 to its May peak at nearly $75. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock dropped back to a short-term low at around $63 per share in June before rallying again to a new, lower high at around $68 this month. Current support for the stock is around $65, inline with the 38.2% retracement line, with immediate resistance at the last peak at $68. The stock is approaching resistance right now, which means that a push above $68 should have short-term upside to about $71, or even $75 if bullish momentum accelerates. If sentiment reverses to the bearish side, a drop below $65 could see the stock fall to around $61.50, a little the 50% retracement line and consistent with pivot activity seen in March as well as November of last year.

Near-term Keys: TJX offers an interesting, if not quite compelling value opportunity at its current price. If you prefer to work with short-term trading strategies, a push above $68 could be a useful signal to think about buying the stock or working with call options, using $71 to $75 as useful bullish profit targets. A drop below $65 could also provide an interesting signal to consider shorting the stock or buying put options, looking for a bearish profit target at around $61.50.


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