Yesterday evening I slipped into some old Under Armour (UA) threads, went to the track and rocked my bootleg supplementary workout routine in the rain. Unfortunately no inspiration was to be found. That was understandable, as it was after I'd played a game Wednesday night called, "How many earnings call transcripts can I read before 1 a.m.?"
Inspiration for writing, analyzing the market, and life in general is often found when you least expect it, so I was pleasantly surprised to have an idea form upon viewing a picture of a giant pig that washed ashore in New York City. The darn thing looked like a mutant cow -- and I immediately saw a connection to the market. In this guy's opinion, the definition of stock-market "value" is mutating right in front of our eyes and nobody realizes it. Or maybe they do realize, but they are unwilling go with the flow a tad and formulate different types of calls in a different type of investing climate.
Finding value in the market has usually meant doing a screen for stocks with low price-to-earnings multiples, and then -- assuming you're doing a screen for long ideas -- digging in to those companies to search for individual catalysts or the potential to could go along for an improving macro ride. Traveling this well-worn investing path has undoubtedly worked for me through the years, and it has likely worked for you as well. However, as we reflect a bit on a massive week that was for corporate earnings, take these thoughts into the weekend:
1. "Value" is in the eye of the beholder, in this instance the market -- not what was written in an investing bible in 1903.
2. "Value" is not always a key attribute to a low P/E multiple stock.
3. "Value" is currently in stocks valued at premiums to their peers. It's in companies posting the sales and earnings growth that not only back up the valuation, but suggest added value will be created for quarters to come.
Here are a couple of examples of these newly defined "value" holders.
Whole Foods (WFM): At the current same-store sales run rate, Whole Foods' older locations are producing crazy-robust metrics as far as their return on invested capital is concerned. Even modeling a moderation in the same-store sales run rate, more value could be realized amid new productions, plus a ramp in new unit growth funded by operating cash flow. By the way, Whole Foods is a "richly" valued stock. Hmm, but is it really?
GNC (GNC): This is another name valued at a premium to most specialty retailers in the mall. Further value could be brought to the surface for shareholders, however, through new proprietary product introductions, new unit openings globally and a loyal customer base that drives results around those two factors.
Look at it from this angle. Would you rather pay up to own obvious quality or pay down to own garbage that may turn into quality, but also may not, in light of global demand conditions? I just don't believe this market, in the near-term, will gamble that certain bruised stocks could gain 25% into an uncertain year-end. But, hey, that opinion could change. After all, Sandy Weill's did.
Do Your Research Along With Me
Electronic Arts (EA) shares traded lower in sympathy with Zynga's (ZNGA) un-fun earnings results. This is logical, given that the console king is now a major player in social-media gaming --and on mobile platforms. But, in the past few months, the tone of CEO John Riccitiello's comments on Electronic Arts' unrealized value has been intriguing. In fact, this is some of the strongest commentary I've heard from him since he returned to the company years ago.
The stock trading on a very non-tech-like P/E multiple, and very non-EA-like P/E multiple. It also has a cash-rich balance sheet, two years of restructuring under its belt and a stable of brands being metamorphosed into gaming universes. As a result, my research efforts this weekend will be focused here. Please write into me if you are doing research on the company and have any questions -- I am totally available.