Stock Exchange: The Role of Valuation in Trading
Investors who use valuation do it in an absolute sense — the way we do in our Great Stocks program — but what about traders. When the market sets a price that is much different,
Our guest expert this week is Robert Marcin, the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). We invite our readers to follow him on Scutify.
Week—Oscar Eats Out
This week’s picks are especially interesting from a value perspective. Our technical models often sense a change in valuation – which they find attractive. Robert has a different take.
Oscar: This week, I like the restaurants sector. We’ll use Bloomin’ Brands (BLMN) as an example:
Price has been highly variable, though its current price matches up almost exactly with its 200 day moving average. That’s part of the reason why I would move to make this part of a restaurants sector holding for the next month. I predict modest gains, likely near the $20 level.
Robert: Bloomin Brands is an inexpensive stock but with little fundamental catalyst to drive shares higher unless it’s simply broad restaurant exposure one is looking for.
Oscar: I am shooting for the broad exposure, but I like the price here too.
Robert: The stock is cheap at 12.5x’s earnings and 7x’s ev/ebitda, but with little growth in revenues or earnings forecasted, there’s not a lot of conceptual appeal here for a sustained move higher.
Oscar: How about my $20 target? What are my risks here?
Robert: The stock is still down a bunch and can bounce back toward the old highs of mid $20s, but a holding company for Outback, Carabbas, Bonefish and Flemings doesn’t sizzle like the latter’s steaks. Risk here includes high debt and restaurant industry overcapacity which seems to have hit entire category with price discounting.
Oscar: Ouch. The stock may not sizzle, but that was quite a burn.
I’m comfortable with my current holdings, so I’d like to look back at my first pick of the year. On 1/5/17, I got into Shopify (SHOP) around the $50 range. Since then, the returns have far exceeded expectations. Let’s take a look:
We’re currently sitting around $64.84 after only two short months. The 50 day moving average, of course, has spiked accordingly. While I generally try to hold positions for months (if not years), I might reevaluate here in light of recent gains.
Robert: This is the pure play growth company in the group with its business model of cloud based multi channel commerce platform services still expanding rapidly. Some 400,000 small and mid sized businesses/startups who want access to ecommerce and retail get their services for modest monthly fees and sell sell sell to the world on most major internet platforms.
Felix: Sounds like a glowing review! Jeff is usually a bit tougher on us.
Robert: Well, now that you mention it…Revenue growth has been 100% per annum but is now slowing down to 50% as the company hit $400ish mm in sales last year and are projected to hit $600 mm this. The stock is expensive at 10x’s sales with the company at break even levels as it spends/invests to grow.
Felix: Expensive? I’ve been sensing a lot of growth in this sector. Don’t you think this one has a little room to run?
Robert: As a pure play, beat and raise growth company, the stock clearly has the hearts and minds of growth and momentum investors. IF one is bullish on stocks, there’s no reason this standout should stop here if their growth continues at such a torrid pace. Primary risk here is very high valuation.
Holmes: After searching more than 700 stocks for the last 5 trading days…I have not found a single stock that fits in my risk/reward schema. So, this week I’m sitting on the sidelines hoping some of my previous picks will carry the load.
I don’t attach any meaning to not finding a name this week. But I do think this might be hint for me to head out for a long overdue vacation.
J: I thought you just came back from vacation.
H: And I thought you were off this week.
Athena: My momentum play this week is Citigroup (C). Here’s the chart:
As usual, I’m buying after a recent pop, with hopes of another spike over the next couple weeks. February was a good month, and the 200 day moving average suggests a continued rate of steady growth.
Robert: Citi is my favorite of the bunch. Its’ a cheap stock 10x’s eps and .9x’s book value) with improving fundamentals and a chart that seems ready to break out. The bank has a wonderful, global franchise as well as strong domestic businesses also, yet has been under earning vs peers so there’s profit margin expansion potential here.
Athena: Well alright! Anything I’m not seeing here?
Robert: This company should benefit from Trump Administration regulatory reforms and Fed’s rate hiking process as well. Also, legal expense seems to have peaked and should decline adding more to bottom line. It’s at the high end of a range, but I would expect it to break above $60 convincingly and run from here.
Athena: What kind of risks might I have here?
Robert: Risks include a low dividend yield vs peers and negative impact from trade wars/restrictions as its most internationally exposed.
Athena: I can deal with that – for two weeks.
Background on the Stock Exchange
Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.
If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose Robert, although our feelings will not be hurt very much if you prefer one of the models).
Finding value stocks is difficult work. By definition, you’re looking at positions that are currently unloved. It can take time before the market catches up with the potential you see in the stock. The key question is whether you can afford to ride it out until the market agrees with your assessment.
It often seems that short-term traders are ignoring a stock’s fundamentals. This week’s examples illustrate that value is sometimes reflected in the charts.