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Dr. Paul Price
Articles  | Author's Website |

Two for the Money

Nobody knows the true worth of a stock like the people running the company

September 04, 2016 | About:

For big gains, follow the money.

Value investors seek out stocks that appear cheap on fundamentals. That usually only happens when the markets are getting pounded or the underlying firm is having some, hopefully, temporary problems.

Buying interest from company officers can help ratify your view that a sell-off is an opportunity rather than a value trap.

Two high-quality stocks at rock bottom valuations just attracted major open market interest, which points to the likelihood for future gains.

The first one is Dollar General (NYSE:DG). Two directors ponied up a combined $1.363 million to own shares in the $75 to $76 price range, down from what was an overpriced annual peak of $96.88. The stock got even cheaper over the next few days, closing on Sept. 2 at $73.32.

Media outlets were falling all over themselves trying to explain why the shares were down while ignoring the spectacular results since DG came public again on Nov. 13, 2009.

FY 2016 and 2017 estimates were trimmed to $4.51 and $4.94. Both would still represent all-time bests for this well-managed company.

As of last Friday, the shares fetched a slightly lower than average multiple on this year’s already reduced projection. Its P/E on expected FY 2017 EPS is under 14.9x.

Perhaps those DG directors are on to something. A simple regression to a more typical valuation supports a Dec. 31, 2017 target price of at least $83 to $84. The 25-cent quarterly dividend provides a better-than-bank-account 1.36% current yield while you wait for a rebound.

The recent pullback should not have surprised anyone. DG typically topped out (red-starred periods above) whenever its P/E approached or exceeded 20x current profits. Every sell-off since 2009 (green-starred) has proven to be a great entry point for those with reasonable time horizons.

Norwegian Cruise Line Holdings (NYSE:NCLH) is another stock with great appeal right now. CEO Frank Del Rio, the company’s most informed investor, couldn’t resist adding $3 million dollars worth of shares on Aug. 31, 2016 at an average cost of $35.94.

NCLH touched an all-time peak of $64.27 in the fall of 2015, on EPS of $1.86. The mid-point of this year’s guidance now sits at $3.35.

The news of his purchase initially sent NCLH flying. It rose briefly to over $38 before settling back to close last week at just $35.61. Media coverage of tropical storm Hermine and the Zika virus might have been taken as short-term dampers.

Before getting too upset about Zika, think back to Ebola and SARS, both of which were going to destroy the travel industry. Few people even remember them these days. Late summer and autumn storms? They are just normal, though irregular, road bumps in the travel industry.

Like Dollar General, NCLH cut its forecasts for this year and next. Also like DG, however, both new expectations would still be record results.

Growth metrics since the firm’s IPO have been fabulous. The low share price simply made the stock available at a price that does not reflect the huge business improvements logged since 2013.

At 10.6x this year’s, and about 8.8x 2017’s projection, NCLH has never offered better value than it does today.

Value Line sees profits rising to $5 to $6 per share and 16x as a sustainable P/E over the coming three to five years. That suggests a target price north of $53 by Dec. 31, 2016. Around $65 seems possible by the end of 2017.

Independent research house Morningstar came to a similar conclusion. They assign NCLH their highest 5-star rating, while calling present-day fair value as $61.

Morningstar’s price to fair value relationship chart clearly illustrates the huge degree of current undervaluation. No wonder the CEO was buying.

Individual investors in Dollar General and Norwegian Cruise Lines can now get in more favorably than the insiders did.

Option savvy traders might also consider selling puts out to March 2017 on NCLH, or as far away as Jan. 19, 2018 with DG. Both stocks should be nicely higher well before those expiration dates.

Disclosure: Long shares of NCLH, short puts on DG and NCLH.

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Dr. Paul Price


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