Can just a so-so company be a good investment? You bet it can. The trick to making money in the market is to get great value when purchasing. After that, a simple regression to the mean share price movement can provide fine investor returns.
Little known Village Super Market (VLGEA) serves as a perfect example of this type of stock. The name Village does not register with investors but their operating company's name, ShopRite, is well known in the Mid-Atlantic region.
VLGEA's most recent decade of data shows both positive and negative factors. Every major metric exhibited long-term growth. Dividends almost tripled while book value gained more than 54%.
There was little improvement in EPS, though the company remained solidly profitable year after year. Total shareholder returns of 47.6% were positive but unexciting.
Why be interested in Village Super Market then? The stock has proven to be a reliable trading vehicle for value sensitive investors. A slight sell-off on Jan. 16, 2018, left the stock at under $23, at 13.9x forward estimates and yielding a juicy 4.36%.
Here's why that price is intriguing. VLGEA typically carries around a 16.5x P/E. Since 2010 its normalized yield has been 3.34%. Every sojourn to well below that normalized valuation (green-starred on the chart) has provided a good shot at substantial trading opportunities.
Every time VLGEA became too popular, as judged by its multiple and yield, the stock came back to earth. Both up and down "regression to the mean" activities played out over months rather than years.
There's every reason to think Village can recover to a more typical valuation. That supports a 12-month target price about 18% above Tuesday's closing quote. Add in a year of dividends, without assuming any rate increase and you'd see greater than 22% in total return.
That goal is far from an upper limit. VLGEA topped out between $31 and $39 during each of the past eight calendar years, including 2017. Also, Value Line sees the company finally breaking out with higher EPS over the coming years.
Their projection is that, by 2020 to 2022, Village can post earnings of $2.55 per share while boosting the dividend rate from $1.00 to $1.30.
Achieving those numbers would make the shares even more attractive than described earlier.
In a market bursting with overpriced blue chips and extended P/Es on tech, shares like VLGEA's stand out as a port in the storm. The stock has been basing since last summer and seems poised for an upside breakout.
People will always need to eat. ShopRite has been a much loved fixture in its regional markets.
Pick up some stock, enjoy the better-than-bond-coupon yield, and be prepared to take profits the next time VLGEA levitates to the $27 - $31 zone.
This commentary originally appeared on Real Money Pro on Jan. 18. Click here to learn about this dynamic market information service for active traders and get daily columns like this from Paul Price, Tim Collins, Doug Kass and others.
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