GuruFocus has recently developed the GF Fair Value Line, a unique method of estimating the intrinsic value of a stock.
Building off of the popular Peter Lynch chart, which compares a stock's current price to how much its earnings per share would be worth if it traded at a price-earnings ratio of 15, the GF Value Line seeks to take more than price alone into account when attempting to determine value. This new metric considers the following three categories of information:
- Historical price-earnings, price-book, price-sales and price-to-free cash flow ratios.
- A GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business' performance.
In addition to viewing a stock's GF Value chart on its summary page, GuruFocus users can also use the All-in-One Screener to screen for stocks based on how their current share prices compare to the intrinsic value estimated by the GF Value Line. If the ratio of the price to the GF Value Line is less than 1, the stock is likely to be undervalued. However, if the ratio is too low, it could indicate the presence of a value trap, i.e., a stock that appears undervalued at first glance but truly deserves the low valuation because of declining business or financials.
With the holidays coming up, investors may find themselves interested in which retail stocks are in a good position to benefit from the boost in shopping. Thus, I searched the All-in-One Screener for retail stocks that were trading at a price-to-GF Value ratio between 0.4 and 1. I then further filtered the results to include only companies with financial strength and profitability ratings of at least 4 out of 10, as these stocks are more likely to represent companies that have the strength to survive and thrive despite the recent economic recession. According to the screener results, three companies that meet these criteria are Sally Beauty Holdings Inc. (SBH, Financial), Kohl's Corp. (KSS, Financial) and O'Reilly Automotive Inc. (ORLY, Financial).
Sally Beauty Holdings
Sally Beauty is the largest professional beauty supply retailer in the U.S. The Denton, Texas-based company sells products such as salon-quality hair color, nails, makeup, hair treatments and salon equipment through 3,700 physical locations worldwide as well as its online store.
On Dec. 11, shares of Sally Beauty traded around $11.69 while the GF Value stood at $15.69 for a price-to-GF Value ratio of 0.75, making the stock modestly undervalued.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The Piotroski F-Score of 4 out of 9 and Altman Z-Score of 2.21 are typical of a financially stable company. The return on invested capital typically surpasses the weighted average cost of capital, indicating the company is creating value.
The most notable guru shareholder of the company is Ken Fisher (Trades, Portfolio) with 1.97% of shares outstanding, followed by Jim Simons (Trades, Portfolio)' Renaissance Technologies with 0.82% and Mario Gabelli (Trades, Portfolio) with 0.52%. Gurus have been buying the stock more than selling it in recent quarters:
Wisconsin-based Kohl's is an American discount department store chain that sells a wide variety of products, including clothes, shoes, jewelry, electronics, furniture, beauty and fitness products. It has more than 1,100 locations in every U.S. state except Hawaii.
On Dec. 11, shares of Kohl's traded around $38.24 while the GF Value stood at $45.55 for a price-to-GF Value ratio of 0.84, making the stock modestly undervalued.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10. The Piotroski F-Score of 4 out of 9 and Altman Z-Score of 2.76 are typical of a financially stable company. The company has achieved a three-year revenue growth rate of 4.8% and a three-year Ebitda growth rate of 2.6%.
The most notable guru shareholder of the company is the T Rowe Price Equity Income Fund (Trades, Portfolio) with 1.79% of shares outstanding, followed by Steven Cohen (Trades, Portfolio) with 0.75% and Louis Moore Bacon (Trades, Portfolio) with 0.19%. In recent quarters, gurus have typically been buying the stock more than selling it.
O'Reilly Automotive is the company that owns the O'Reilly Auto Parts retail chain, which sells automotive aftermarket parts, tools, supplies, equipment and accessories to both professional service providers and do-it-yourself customers through more than 5,400 locations in the U.S.
On Dec. 11, shares of O'Reilly traded around $447.94 while the GF Value stood at $477.48 for a price-to-GF Value ratio of 0.94, making the stock fairly valued.
The company has a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The Piotroski F-Score of 6 out of 9 and Altman Z-Score of 3.08 indicate the company has decently strong financials. The company is continuing to grow its operating margin and net margin strongly, with both metrics surpassing more than 94% of retailers.
The most notable guru shareholder of the company is Chuck Akre (Trades, Portfolio)'s Akre Capital Management with 2.54% of shares outstanding, followed by Pioneer Investments (Trades, Portfolio) with 1.24% and Diamond Hill Capital (Trades, Portfolio) with 0.44%. Gurus went on a buying spree of the stock at the end of 2019 and the beginning of 2020, though they have been selling the stock in higher volumes in recent quarters.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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