40 Years of Knowledge Is Power in Investing

Understanding where a stock stands in relation to its true worth allows for good decision making. How can you know the proper price for a company's shares, though? Its own prior trading history provides the best guide. I'm going to use Kohl's in my article today as its earnings per share have stayed within a narrow range since 2011. The firm's best year came in at $4.30 while its worst during that seven-year period was $3.11. FY 2017 (ends Feb. 3, 2018) EPS is expected to finish at about $4.05. Kohl's is a perfect example of a healthy, but unexciting, company. Despite only small variations in profitability, KSS shares offered numerous good trading opportunities. Over the past eight years Kohl's average P/E has been 13.3x. Since initiating dividends in 2011, KSS's typical yield has been around 3.16%. Those figures, all by themselves, could have pointed out the extreme value offered up at Kohl's three best entry points (green-starred below) since 2010. Buying in at 8.7x to 10.9x multiples represented 18% to 34% discounts to KSS's own normalized P/E. Each of those three buying opportunities also provided well-above-average yields, ranging from 3.39%, in early 2013, to an astonishing 6.62% at last summer's panic low. The stock's three should have sold moments (red-starred) each occurred with Kohl's selling for premium multiples versus KSS's typical P/E. Timing your trades was as simple as buying when sale prices were advertised (in the stock tables) and selling when the merchandise (KSS shares) was priced too high. Kohl's amazing seven-month run from south of $36 to near $68 came mostly courtesy of P/E expansion. KSS shares are once again priced at a higher-than-normal multiple of 15.6x its projected FY 2018 estimate. The stock could continue upward but its regression to the mean 12-month target price now sits at under $58 even if all goes well business-wise. Why hang around knowing that there's a good possibility for a $10 per share pullback? Independent research from Morningstar suggests risk could be even worse. The firm calls present day fair value as just $49, implying downside of almost $19 per share. Using clear-cut past data to guide future price projections made for unequivocal negative 12-month price projections for Kohl's. Contrast that to the ridiculous and unusable advice on KSS from Standard & Poor's. With Kohl's at $67.54 S&P-ranked the shares as a three-star Hold. It's hard to justify that considering that the analyst's one-year price target was $41. But wait, there's more. S&P's computer-generated fair value logged in at $61.32, around 9.25% below where they said to hold. Insider activity appeared favorable as did their technical opinion. With bullish, bearish and neutral ratings on the same stock, at the same time, what value can there be in a report offering advice on what to do with Kohl's? Every stock's own history is the best guide to its future. It represents what the market has typically been willing to pay for the same shares. Forty years of successful investing has taught me that historical P/Es and yields, on dividend-paying shares, are the best metrics to use. Traders lucky enough to have caught Kohl's recent surge should be locking in gains right now. It appears to be too late in the cycle to safely continue riding the momentum train.

40 Years of Knowledge Is Power in Investing

Historical P/Es and yields on dividend-paying shares are the best metrics to use in stock-picking.

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