When I see stocks trading at or near historical highs I almost always assume that the stock is overvalued.
That’s even more true if the stock is near to an all-time high and has been following an upward trend of more than a year. A similar, opposite logic applies to stocks in a downward trend; the longer the trend has extended to the downside, the more I tend to wonder if the stock might be worth taking more seriously. This is a mindset that is more than a little different from most growth-oriented investing methods, which is why value-driven investors like me are often called contrarians.
One of the reasons trends covering different time periods is important to recognize is that over those differing time ranges, the factors that carry the greatest weight isn’t always the same. Some trends are driven primarily by nothing more than current news, market sentiment and the ebb and flow of current momentum. That’s true of short-term trends. What I like to call intermediate-term trends – those that cover three to nine months, roughly – also reflects some of the same influences as short-term trends, but are often also dictated by other, somewhat broader factors, like industry or sector momentum. Longer trends, which generally cover a year or more, are usually influenced the most by national and global economic shifts and trends, and on an individualized basis, also by a company’s fundamental strength.
When you get the combination of a growing, healthy economy along with a fundamentally solid company with a growing business, it’s pretty normal to see that company’s stock price trading at or near historical highs. That’s because investors will recognize the company’s ability to grow their business and jump on board for the ride. That can obviously put the stock in overbought, overvalued territory at the extreme; but one of the things that can also happen in some cases is that the stock’s higher price really just reflects the increasing intrinsic value of the underlying business. A stock in a long, downward trend usually has investors staying away, because some of the same logic applies, again in reverse: the downward trend can be influenced by weakening fundamentals, and if that is the case, the stock’s price should logically be lower.
This is an idea that lies at the heart of value investing; a company with a growing business should naturally offer greater and greater returns to stakeholders. In a private company, that usually means that the portion of profits distributed to those stakeholders should grow each year that the business grows. In a publicly traded company, the most tangible way that growth gets back to stakeholders is by an increase in the stock’s trading price. Often, however a stock trading at historical lows is being driven by simple market momentum and broader economic factors that are outside of management’s control; but when you drill down into the company’s details, you may be able to clearly see that the intrinsic value of the company is higher than the stock’s price. This is the sweet spot for value investors like me, and it’s why I get more interested when I see a stock dropping significantly off of historical highs.
Agilent Technologies, Inc. (A) is a company that could fit this description right now. This is a stock that peaked in December of last year at a high around $160, but has dropped into a downward trend through the first quarter of 2023 that now has the stock -15% off of that high.. The question, of course is whether that drop is enough to mark a useful value price for the stock now, or whether there is more downside ahead. Let’s dive in.
Fundamental and Value Profile
Agilent Technologies, Inc. (A) provides application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow. The Company serves the life sciences, diagnostics and applied chemical markets. It has three business segments: life sciences and applied markets business, diagnostics and genomics business, and Agilent CrossLab business. Its life sciences and applied markets business segment offers instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Its diagnostics and genomics business segment includes the reagent partnership, pathology, companion diagnostics, genomics and the nucleic acid solutions businesses. Its Agilent CrossLab business segment spans the entire lab with its consumables and services portfolio. A has a current market cap of about $40.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing 13.2% and sales by about 5%. In the last quarter, earnings declined by about -10.5% while sales declined a little more than -5%. The company’s margin profile is healthy, and improved in the last quarter compared to the trailing twelve months, from about 19% (TTM) to just a little above 20% (quarter).
Free Cash Flow: A’s free cash flow is modest, at $1.06 billion. Free Cash Flow has also increased steadily since the second quarter of 2015 from a little over $200 million, and been stable for the past year around its current level. That translates to a Free Cash Flow Yield of 2.58%.
Debt to Equity: A has a debt/equity ratio of .49. This is generally conservative and implies a manageable approach to leverage. The company’s cash and liquid assets were $1.25 billion in the last quarter against $2.7 billion in long-term debt. The company’s margin profile indicates servicing their debt shouldn’t be a problem.
Dividend: A pays an annual dividend of $.90 per share, which translates to a yield of 0.65% at the stock’s current price. While that sounds unremarkable, it is worth noting that most technology-driven companies do not pay a dividend at all. Management also increased the dividend payout at the end of 2022, from $.84 per share. An increasing dividend is a strong sign of management confidence.
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 around $116 per share. That means that A is is overvalued by about -15% right now, with a useful discount price at around $93 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 measures the length of the stock’s long-term upward trend from its bottom in June 2022 at around $112.50 to its December peak at around $160. It also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock moved into a clear downward trend in January, bottoming at around $131 last month before rebounding a bit to hit latest resistance at around the 38.2% retracement at $142. Immediate resistance, however is around $136, where the 50% retracement sits, since the stock is currently dropping below that level. Current support is back at $131. A push above $136 should have upside to about $141, while a drop below $131 could have additional downside to around $127.
Near-term Keys: If the stock continues to move lower, there could be an opportunity to either short the stock or to buy with put options, with a useful target at around $131, and $127 if bearish momentum accelerates. A push above $136 could be a good signal to buy the stock or to work with call options, using $141 as a practical exit target on a bullish trade. Unfortunately, at the stock’s current price, it doesn’t offer a useful value proposition, which means that if you’re looking for a long-term opportunity, set this stock aside and come back to it in a month or so.