The Long and The Short of It
By Michael Hlinka,
In March’s column, I warned about sanity returning to the stock market. Risk premiums were returning to more normal levels, which meant a pull-back in many stocks, in some cases moderate, on other cases extreme. That correction has largely taken place.
What this means to an “intrinsic-value” oriented investor, like yours truly, is it’s increasingly difficult to find either great long or short candidates. So, I’m presenting two ideas this month with only moderate conviction. With that disclaimer out of the way, my long pick is VF Corp (NYSE:VFC), which closed on August 31st, 2023 at USD$19.76.
VFC is an apparel company with several well-known brands which include: Vans®, The North Face®, Timberland® and Dickies®. VFC presents itself as the company with a diverse portfolio of products for activity-based consumers. This is not stuff I would personally buy, but there’s a lot of outdoorsy people.
Not that long ago, VFC was a Wall Street darling which saw its shares peak at just over USD$100 in January 2020. At the time, it seemed to be a fantastic growth story. But sales have been declining lately which explains the precipitous collapse in its share price. It’s starting to looks much more like a value play in my eyes. VFC currently pays a juicy dividend of USD$0.30 per quarter, which means an annual yield of 6.19%. Is that dividend 100% safe? According to the recent guidance provided by management, the company will achieve earnings per share (EPS) of between USD$2.05 and USD$2.25 for the current fiscal year, so you can be the judge this one on your own.
Let me ask you a quick question: Do you know anyone who doesn’t like pizza? I don’t think I do. Right now, my seven-year-old son’s favourite chain is Domino’s Pizza Inc (NYSE:DPZ), which closed on August 31st, , ticker symbol DPZ, August 31st, 2023 at USD$387.40.
But beware: great pizza doesn’t necessarily translate to a great share price. This stock is trading like it’s still a growth stock and I’m not nearly as confident about it. Look at the growth rate in sales over the past five years… in order:
+23%, +5.4%, +13.8%, +5.8%, + 4.1%... and after two quarters this year, sales are slightly negative! Yes, DPZ is still generating a ton of free cash which allows it to raise its dividend and buy back shares at the same time, but this train is no longer the bullet it once was.
I’m not saying that Domino’s is headed for bankruptcy any time soon. The company uses debt prudently. But given that its net income to sales ratio has been extremely consistent, ranging from 10% to 12%, it’s not particularly difficult to project EPS for the current year: between $13 and $15 seems right. Since growth has also started to flatline, I think it’s generous to give it a multiple of twenty times earnings which translates to a price target of USD$300, and that’s being conservative.
Bottom line(s)
2-year price target for VFC: $27.50 (currently $19.76)
2-year price target for DPZ: $300.00 (currently $387.40)
Update
On August 16th, ETSY hit the $75 price target I established in May. The short position was closed with the holding period return 26.0%. The annualized return was slightly above 100%.
All articles published by PAIP Canada Inc. are for informative purposes only, and do not constitute advice. We recommending consulting by a subject matter expert before making any financial decision(s).