One of the hardest parts of profitable investing is ignoring expert opinions, which often lead you to do exactly the wrong thing.
Thursday provided a good example. Dollar Tree (DLTR) reported solid fiscal Q2 numbers that were within one-cent (0.9%) of the consensus estimate of $1.16. Management guided full FY 2018 estimates down by 2%, to a mid-point of $4.95 versus a previous $5.05 projection.
Slight misses like those should have little impact on expected share price movement. Instead, the analyst community which had been wildly bullish on DLTR going into that report, turned viciously negative on the shares.
By 2:57 p.m. ET Dollar Tree had sunk drastically to $80.16. By definition, when estimates drop 2% but the stock plunges by 15%, the value relationship for new buyers gets better, not worse.
Specific brokerage firm recommendations made no sense. Barclays had an overweight rating before the drop but went to neutral. Loop Capital lowered its price target from $120 to $106. I don't know about you. I'm happy to buy shares near $80 that are worth $106, or about 32.5% more than their current quote.
Dollar Tree has been a bastion of growth over the most recent decade, even on the newly reduced guidance reflected on the table below. Management didn't become dummies overnight simply because the latest quarter came in just shy of estimates.
Dollar Tree's long-term average P/E has been 18.3x. Thursday morning saw that number contract to a below normal 16.9x this year's tweaked estimate. At the 3 p.m. price, new buyers could get in for just 16.2x FY 2018's EPS.
When enthusiasm for DLTR ran high (red-starred periods) the stock reached 22x to 26x current earnings. Occasional sojourns to bargain levels (green-starred) often looked fairly similar to the current valuation.
It doesn't seem farfetched to think DLTR can revert to a normalized multiple on next year's now downwardly revised $6.00 per share projection. That would support a 12- to 18-month target price approaching $110.
Check out the chart before dismissing that notion as crazy. DLTR topped out at $110.90 in 2017, and hit $116.65 YTD in 2018. It reached almost $100 back in 2016 on EPS that closed at just $3.78.
My $109.80 goal is more likely to prove conservative rather than too aggressive.
Option writers can do well by playing with DLTR's Jan. 17, 2020 expiration date puts. The data below reflect early in the day quotes, when DLTR was still trading in the mid-$83s. Put premiums are higher now (read: more attractive) with DLTR more than $3 lower.
Even the most aggressive of the strikes shown above brought the forced purchase, if put, price to below Dollar Tree's 52-week low of $78.32. Sellers of that $90 put at 3:25 PM (with DLTR @ $80.22) could probably pocket $15.80 per share, creating a $74.20 break-even point.
Why be swayed by analysts, wrong before and now embarrassed by their prior bullishness, when the facts suggest DLTR offers excellent upside with low risk?
Buy DLTR shares, sell some long-term puts or consider doing both.
(This commentary originally appeared on Real Money Pro on Aug. 31. Click here to learn about this dynamic market information service for active traders and to receive daily columns like this from Paul Price, Bret Jensen, Doug Kass and many others.)