It's Better to be Months Too Early than a Day Too Late
Kelly Services is primed for its next move back to $25+.
Some stocks are long term wealth creators that can be purchased and simply left alone. They have their ups and downs but, over time, their price will reflect the fundamentals. Shares like that can form the core of a buy-and-hold portfolio but they often make for unexciting holdings and seldom provide heart-racing moves.
There are other companies of profitable, solidly financed firms that move around readily, making them into ideal trading vehicles for people looking for action and shorter-term outperformance.
Temporary staffing company Kelly Services Class ‘A’ (KELYA) falls into the latter category. Its balance sheet is net debt-free, its dividend is a well-covered 1.21% and the high-beta shares just carved out a new 52-week low during Thursday’s broad market sell-off.
Kelly’s financial strength removes the major risk that traders face with many volatile issues. Troubled businesses like J.C. Penney (JCP) or Plug Power (PLUG) move around like crazy but are losing tons of money. The next recession could put them out of business leaving shareholders holding empty bags. KELYA provides enough movement over time to allow for great percentage gains without worrying about survival of the franchise.
Buyers at 2010’s low had a chance to double in under a year. KELYA moved up 67% from October 2011 to February 2012. The July 2012 bottom offered a shot at a 68% profit over an eight month period. 2013’s mid-year pullback preceded a better than 59% 12-month rise.
2014 is expected to be a down year for Kelly Services with EPS falling from $1.53 to about $0.90. Is that a reason to avoid the stock now that it’s retreated from above $26? No. Brave souls who bought KELYA during the 2008-09 recession ignored the company’s only losing year in the past two decades. The stock more than tripled from the March 2009 level in less than a year as earnings rebounded.
Management has been investing heavily this year to position Kelly for large gains starting in 2015. Value Line sees a doubling in EPS next year putting KELYA’s forward P/E at just 9.2x based on Thursday’s close of $16.53. That squares quite well with Morningstar’s view.
Standard & Poors is projecting Kelly’s earnings at $0.99 this year and $1.84 in 2015. S&P rates KELYA’s overall quality in the top 17% of all companies they follow. S&P's assigns KELYA a 4-star (out of 5) BUY rating and carries a 12-month target of $27.
Smart traders should be using the recent sharp pullback to build positions now.
During three of the past four, and six of the past eight, calendar years Kelly peaked at absolute prices of $20.30 - $34.00. Price / Book Value is typically 1.1x or above when the shares top out. This year's Dec. 31st book value is expected to be $22.65. That would support a 12-month target price (@ 1.1x BV) north of $25.
History says that is a reasonable goal. KELYA fetched $25.80 during 2013 and changed hands at $26.17, less than five months ago.
People that were happily buying Kelly above $25 have been dumping the stock in the mid-$16s. Their loss can be your gain if you have the foresight to buy when others are selling in despair due to a ‘bad chart’ and poor momentum.
Disclosure: Long KELYA shares, short KELYA puts
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