Loosen Up and Buy Retail Chain The Buckle

One of the hardest thing to do when investing is to buy a bad-news stock that's available on the cheap. Your intellect screams, This time is not different! -- but your emotions lead you to wonder if maybe it really is. Consider retail chain The Buckle (BKE), which tanked after reporting an 11.8% drop in March same-store sales on Thursday. The stock was trading below $29 on Friday afternoon, down some 50% from January 2015's $56.13 intraday high. Now it's true that retailing has been in a funk and the move to more online buying will never reverse. But the absolute return on bricks-and-mortar retailers can still be compelling at low-enough valuation levels. Just look at Bed Bath & Beyond (BBBY), whose stock price recently rebounded from less than $42 a share on Jan. 28 to better than $52 intraday on March 8. That's a nearly 24% pop in less than six weeks. And despite all of the known negatives, BBBY recently posted all-time-high earning per share for fiscal 2015. As for The Buckle, the chain is debt-free, management is very shareholder friendly and a glance at the stock's history shows just how good its valuation has become: BKE was trading Friday at just 9.9x or so analysts' reduced fiscal 2016 estimates of $2.89 EPS. The stock also offers a well-covered 25-cent-per-share quarterly dividend, which translates into about a 3.5% yield. Such numbers are quite favorable when viewed against previous great entry points for BKE, denoted with green stars in the chart above. The Buckle's long-term normalized multiple has been 13.3x, with occasional trips (denoted with red stars) to the 14x-to-18x range, where smart investors would have sold. And the chart above actually understates investors' potential profits, as BKE declared significant special dividends in each of the past six years (as well as in nine years out of the past 10). In addition to The Buckle's generous regular payouts, shareholders have received extra payments ranging from $1 to $4.50 a share per year since 2010: A simple regression to the stock's average P/E would support a 12-month price target of about $38.40, while a more-typical yield of under 2% could justify $50 or better as a two-year goal. Both of those are realistic things to hope for. It's also worth noting that BKE has fetched somewhere between $40 to $57 a share during parts of every calendar year since 2010. BKE Puts Look Good, Too Put writers can lock in even-lower breakeven points by selling BKE September 2016 puts at strikes of $27.50 or $30. As of Friday morning, those options would have likely brought in, respectively, at least $2 and $3.60 in per-share put premiums. Using a $27.50 put would drop your if-exercised price to just $25.50 a share for BKE -- a level lower the stock's lowest point of the past five years: The best-case scenario with these puts would be keeping 100% of all premiums received. That wouldn't require any upward movement at all on the $27.50 put from your trade-inception price. Writing the more-aggressive $30 put would also generate a profit as long as BKE stays above $26.40 through the option's Sept. 16 expiration. But note that BKE has spent around 97% of the past five years above the $30 mark. And any drop of up to $2.10 per share (or roughly 7% of BKE's current price) wouldn't cause a loss if the shares are put as long as you sold immediately. The Bottom Line I think this is a good time to invest in BKE shares either outright or via puts, unless you believe that mall retailing is permanently impaired and will never recover. Remember, betting against the U.S. consumer has generally been a foolish wager.

Loosen Up and Buy Retail Chain The Buckle

BKE lost some 50% over 16 months, making it a good buy or put play.

Columnist Conversation

Tuesday Morning Fibocall for 9/29/2020

Another Nice Win for the Stocks Under $10 Portfolio

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.