One of the persistent themes of the past year or so has come as investors and economists have tried to look past the difficult conditions imposed by the COVID-19 pandemic and forecast the best places to look for new investing opportunities is the “reopening trade.” The term refers to the industries and stocks that may be best positioned to take advantage of the expected resumption of “normal” economic activity. That theme seemed to be taking shape after the first quarter of 2021 as vaccines were approved and made available, contributing to declines in infections and hospitalizations, and to various economic indicators that showed economic activity was, in fact, beginning to show signs of recovery.
From summer into the end of 2021, the health crisis came back into full, page one news, as COVID variants found their way into previously unaffected segments of the population, including breakthroughs in vaccinated individuals. With infection rates increasing again, and hospitalizations once again putting big pressure on the Healthcare sector’s capacity as we’ve started 2022, the concept of the “reopening trade” – at least in terms of putting coronavirus firmly behind us – seems to have been a little premature. The interesting side note is that despite health pressures, basic economic indicators have shown strong enough economic growth that the Fed has signaled its intention to raise interest rate at least three times this year, with the first expected increase coming next month. The spectre of rising interest rates is something we haven’t seen in a little over three years, and even then only lasted a short time; the last time any kind of significant raise in interest rates was really seen was during the Great Recession beginning in 2008. I think the fear of what increasing rates means for the economy is a big reason the market has been on uneven footing since mid-December.
Economic uncertainty may blunt some of the enthusiasm for industries tied to the “reopening” concept, and therefore to the stocks in those industries. For contrarians like me, however, that also opens up the potential to start finding stocks in those pockets of the market that could mark the best bargains, since declining stock prices often don’t correlate with a company’s fundamental strength. That’s why, even as others may look to avoid economically sensitive sectors and industries, I usually start to put even more focus on them than I might do under normal conditions.
That brings me to today’s highlight. Levi Strauss & Co. (LEVI) is a name most of us in North America – and even a big part of the world – are familiar with, a brand that I think speaks as much to Americana as country music and apple pie. This is a stock that has been following a strong downward trend for most of the past year, falling from a 52-week high at around $31 to a late January low around $20. Since then, the stock has been rallying and appears to be building bullish momentum in an attempt to reverse that long-term, downward trend. With a fundamental profile that points to healthy liquidity, manageable debt, and solid profitability, this might be a stock that is also offering a useful, value-oriented opportunity Let’s dive in.
Fundamental and Value Profile
Levi Strauss & Co. is an apparel company. The Company designs, markets and sells directly or through third parties and licensees products that include jeans, casual and dress pants, tops, shorts, skirts, jackets, footwear and related accessories for men, women and children under the Levi’s, Dockers, Signature by Levi Strauss & Co. and Denizen brands. The Company operates through three segments: the Americas, Europe, and Asia. Its Asia segment includes the Middle East and Africa. The Company’s products are sold in approximately 50,000 retail locations in more than 110 countries, including approximately 3,000 brand-dedicated stores and shop-in-shops. It has approximately 1,039 Company-operated stores located in 36 countries and approximately 500 Company-operated shop-in-shops. The remainder of its brand-dedicated stores and shop-in-shops are operated by franchisees and other partners. LEVI’s market cap is around $9.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 105%, while revenues grew almost 21.6%. In the last quarter, earnings declined by about -14.6% while sales increased by 12.5%. LEVI’s operating profile is healthy, but reflects the downward slide of the last quarters earnings; over the last twelve months, Net Income was 9.6% of Revenues but dropped slightly, to 9.03% in the last quarter.
Free Cash Flow: LEVI’s free cash flow is healthy, at $570.32 million over the last twelve months. That marks a slight decline from $578.25 million in the quarter prior, but an increase from $218.24 million a year ago.
Debt to Equity: LEVI’s debt/equity ratio 0.61. This is a low number that speaks to management’s conservative approach to leverage. As of the last quarter, the company reported $901.82 million in cash and liquid assets against about $1.02 billion in long-term debt. The decline in Net Income is a modest concern, but even so, debt service clearly isn’t a problem.
Dividend: LEVI’s annual divided is $.40 per share, which translates to a yield of 1.71% 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 worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $27 per share. That suggests that the stock is undervalued by about 16%, with a compelling discount price at around $21.50.
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 downward trend from a peak at around $31 in May of last year to its January low at around $20. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. From that low point, the stock has started to rally, and is approaching immediate resistance a little above $24 where the 38.2% retracement line sits. Current support is at around $22.50, based on pivot activity in December and January as well as in the last few days. A push above $24 should have near-term upside to about $26, based on multiple pivots at the end of 2021 and at different points throughout the past year, with additional room to a little below $27 if buying activity picks up. A drop below $22.50 should see the stock retest its 52-week low at around $20.
Near-term Keys: I think LEVI’s fundamental profile in the face of the past year’s pandemic-induced economic conditions is a very interesting story, and it even offers an interesting value proposition at its current price. The stock’s current activity could offer some interesting signals to work with short-term trades. A drop below $22.50 would offer a useful signal to consider shorting the stock or buying put options, with a useful bearish profit targets at around $20 per share. A push above $24 would be a good signal to think about buying the stock or working with call options, with a practical bullish target at around $26, and $27 if buying momentum accelerates.