Invest via Compass Reading
Relative value is now "good enough" in a ZIRP world
Global central bank actions have turned risk-free returns into relics of the past. Bonds, bank CDs and even money market funds pay so little today that they are almost guaranteed to lose true purchasing power if held to maturity.
Most blue-chip stocks have risen to well above normal valuations, implying a lot of downside risk. Equity investors have adopted the motto of Alaska’s famous Red Dog Saloon. Rather than wait for better values they have lowered the bar regarding what qualifies as an attractive holding.
Under these relaxed guidelines, shares of Compass Minerals (CMP, Financial) looks like a standout for current income along with decent appreciation potential. Compass Minerals sports a reasonable balance sheet, is solidly profitable and pays a juicy 3.87% current yield.
Expected 2016 profits, at $3.40 per share, are likely to fall short of last year’s $4.69. Consensus views for 2017 see an EPS rebound to about $4.34. After 18-months of gradual decline, CMP once again merits a serious look.
Compass shares slid from a 2015 peak of $95.70. At Wednesday morning’s $71.85, the stock yields 3.87%, the highest since 2006. That compares quite favorably with the firm’s post-2009 average yield of 2.68%. It’s also better than it registered at the three best entry points for traders (green-starred below) of the past six and a half years.
The relatively high yield insulates Compass Minerals from volatility as most of its shareholders are willing to sit with it while collecting quarterly payments (beta = 0.85). Hints of good news, or simply stronger market action, occasionally send Compass into the $80s and $90s. CMP touched $81 and higher during each of the last seven calendar years including 2016 year to date. Five of the last seven saw Compass Minerals break above $91 (red-starred).
Income investors could do a lot worse than load up on Compass now with the intent to trade out whenever the next run to the $81-$85 range reappears. If that takes a full year, total return would exceed 15%. Even a two-year wait would allow for almost 10% annualized, assuming only the low end of the expected selling range.
The numbers just laid out might prove to be overly conservative. Research house Morningstar rates Compass as a 4-star (out of 5) Buy while calling fair value as $89.
Morningstar’s price to fair value relationship chart illustrates Compass Minerals’ cyclical trading history. It tends to move between moderately underpriced and mildly overpriced. The stock offers attractive risk-reward from the present quote.
Compass should be treated as an income producing trading vehicle with an expected holding period of six to 24 months. Holding this position is unlikely to cause you grief.
Option writers could collect $5.10 per share for committing to buy via March 2017, expiration date $70 puts. Worst-case forced purchase would occur at a net price of $64.90, a price lower than Compass Minerals’ low in four of the last five years including 2016 year to date.
Buy the stock, sell some puts or consider doing both.
Disclosure: Long CMP shares, short CMP puts.
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