One of the primary and most basic differences between growth and value investing lies in the way that the extreme ends of price swings are interpreted and used. For a growth-focused investor, seeing a stock at or near historical highs is a great thing, pointing to good signs of continued growth, since stocks tend to follow their longer trends. In the same way, a stock at or near historical lows is generally something that a growth investor will simply set aside to look for greener pastures.
For value seekers, the opposite generally tends to hold true. Given that all trends are finite, and will eventually reverse themselves, a stock at or near historical highs is something gives a bargain hunter pause, while stocks in the low end of their historical ranges makes them sit up and pay closer attention.
The distinction between the two investing styles is one of the things that I think makes the stock market so interesting, because no matter what anybody says, one method is not categorically better, or is guaranteed to do better than the other in the long run. The suitability of one method over another really boils down to your own individual preference, and the additional steps and strategies you employ to manage the investments you make based on that method.
Since my focus is primarily on value, my natural inclination when I see a stock nearing historical highs is to assume that there isn’t much upside left, and that any additional increase in price is really based primarily on chance rather than on any useful, fundamentally-driven logic. That also means that while growth-focused investors dismiss stocks at or near historical lows, I tend to sit up and start to think more seriously about whether the stock could offer a useful value-driven opportunity. I have also learned, however that nothing in the market is absolute, which is why I also try to leaven any assumption on a stock, at either end of its price range, with a willingness to dive in to the same details I use for underperforming stocks to see if there might still be a useful value opportunity. Sometimes, a company’s underlying fundamental strength is such that even with the stock at or near previous highs, a reasonable fundamental argument can be made that there is value that the market hasn’t yet uncovered. The simple fact that a stock may be sitting at or near historical lows also doesn’t categorically mean the stock offers any kind of historical value if the company’s fundamentals don’t also fall into line.
One of the interesting stories of the last two years is the way that the Consumer Discretionary sector has shown its resilience in the face of the pandemic, driven by a massive shift to e-commerce services and solutions. Among the shifts that worked in the favor of a lot of different industries in the sector, including stocks in the Textiles, Apparel & Luxury Goods industry has been an increased focus on personal health and wellness. That is an industry that includes well-known players like Under Armour (UA), Nike (NKE), Hanesbrands Inc (HBI) and today’s highlight, Gildan Activewear (GIL). GIL doesn’t have the same cachet that comes from immediate name recognition, but is a very interesting stock because of its focus on private label apparel.
An increasing number of retailers are shifting the products they offer, increasing shelf and floor space in favor of brands offered only in their own stores. One of GIL’s strategic goals is on partnering with traditional retailers to manufacture those private label goods. It’s a trend that is expected to continue to grow, since private labels offer higher margins in the always-competitive retailing industry where margins are consistently thin and becoming even narrower – and where traditional brands like NKE, UA and more have been actively working to develop their own direct-to-consumer systems to bypass the traditional, more costly retail arrangement. I also think there is an argument to be made that, as interest rates increase to combat high inflation in the U.S., the value of private-label goods is likely to be enhanced, as those products are often available at more attractive prices than brand-name equivalents. GIL is a stock that peaked in November of 2021 at around $44, and hit a recent, downward trend low at around $29. That’s an overall decline of a little over -29% over that period, and -27% since the start of 2022. The stock look like it is trying to stabilize in the $30 range right now, which is a technical sign that a lot of value-driven investors like to use to find a good entry point on good bargains. Are the company’s fundamentals strong enough to suggest the stock should move higher, or is the current downward trend indicative of larger concerns? Let’s dig into the details and see for ourselves.
Fundamental and Value Profile
Gildan Activewear Inc. is a manufacturer and marketer of branded basic family apparel, including T-shirts, fleece, sport shirts, underwear, socks, hosiery and shapewear. The Company operates through two segments: Printwear and Branded Apparel. The Printwear segment designs, manufactures, sources, markets, and distributes undecorated activewear products. The Branded Apparel segment designs, manufactures, sources, markets, and distributes branded family apparel, which includes athletic, casual and dress socks, underwear, activewear, sheer hosiery, legwear, and shapewear products, which are sold to retailers in the United States and Canada. The Company sells its products under various brands, including the Gildan, Gold Toe, Anvil, Comfort Colors, American Apparel, Alstyle, Secret, Silks, Kushyfoot, Secret Silky, Therapy Plus, Peds, and MediPeds brands. The Company distributes its products in printwear markets in the United States, Canada, Mexico, Europe, Asia-Pacific and Latin America. GIL’s current market cap is $5.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 58%, while revenues were about 31.4% higher. In the last quarter, earnings growth was exactly flat, at 0%, while sales were -1.2% lower. GIL operates with a margin profile that suffered during the pandemic – which isn’t a big surprise given the conditions – but improved significantly in 2021. Inflationary conditions, however that include supply chain issues that have raised input costs, are showing an effect more recently. Over the last twelve months, Net Income as a percentage of Revenues was 21.08%, but decreased in the last quarter to 18.89%.
Free Cash Flow: GIL’s free cash flow is a little more than $368.66 million, and translates to a Free Cash Flow Yield of 6.36%. The current number does mark a decline over the past year from about $758.4 million, and $490 million in the previous quarter.
Dividend Yield: GIL’s dividend is $.676 per share, which translates to an annual yield of about 2.19% at the stock’s current price. Management suspended its dividend at the beginning of the pandemic, but reinstated it in 2021 and raised at the beginning of this year.
Debt to Equity: GIL has a debt/equity ratio of .50. This is a conservative number that generally implies management takes a careful approach to leverage. GIL’s balance sheet shows a little over $121.57 million in cash and liquid assets (down from $179.25 million in the quarter prior and $393.3 million six months ago) against about $845 million in long-term debt (up from about $600 million in the previous quarter). GIL’s margin profile indicates operating profits are more than adequate to service their manageable debt, however declining liquidity is a red flag.
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. All together, these measurements provide a long-term, fair value target around $31.50 per share. That means that despite stock’s decline in price over the last six months, it is only somewhat undervalued right now, with 2% upside from its current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last year. The red line traces the stock’s downward trend since its peak in November of last year at around $44 to its low, reached this month at around $29; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. Current support for the stock is at the 52-week low around $29, with immediate resistance at $31. A push above $31 should find next resistance at around $33, but could see the stock surge to $34.50 where the 38.2% retracement line sits if buying activity accelerates. A drop below $29 can be expected to find next support at around $27 based on the distance between current support and immediate resistance.
Near-term Keys: If you’re looking for a short-term, bullish trade, look for a push above $31 as a good signal to buy the stock or to work with call options, with an eye on $33 as a useful exit target. If the stock drops below support at $29, consider shorting the stock or working with put options, with $27 providing a good, initial profit target on a bearish trade. GIL is an interesting stock to pay attention to on a long-term basis, however the company’s declines in Net Income, Free Cash Flow and Cash are concerns that I think bear watching for improvement. These items would need to show significant improvement before the stock’s value proposition becomes attractive.