Time to Play Equifax?

 | Sep 18, 2017 | 1:00 PM EDT
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Equifax (EFX) has to be the most hated stock in America right now in the wake of its massive security breach. On Sept. 14 Real Money's own Jim Cramer publicly called for the CEO's resignation while being interviewed on CNBC's morning segment.

Equifax shares have been crushed. Shortly after Cramer spoke, EFX plunged briefly to under $90. It had been coveted by shareholders at north of $147, an all-time high, just weeks ago.

Could that almost 39% headline-induced decline have marked the point of maximum pessimism? Maybe so, but calling bottoms is always tough. Nobody likes to try catching falling knives. Traders who jumped in immediately after the data breach news have been spanked.

EFX now sells for a lower than typical valuation of about 14.6x this year's already reduced estimate. Its current yield is among the best in recent years, due mainly to the sharp pullback.

Independent analysts at Morningstar rated EFX as a 4-star, out of 5, buy, even after taking the news into account. They did lower their fair value estimate to $122. That figure implied about 35% upside from Thursday morning's quote.

It's really hard to pull the trigger on a stock with so many dire headlines. Think back to other, similar situations, though, and it becomes easier.

Remember (BP) 's tragic offshore oil spill of 2010?

It took a few months for that stock to turn around as we all had to watch live feeds of the underwater oil gushing. Brave souls who went in when things looked bleakest saw a better than 84% rebound over the next eight months.

Walmart's (WMT) Mexican bribery problem was a huge media event back in 2012. The stock took about a $6 header after gapping down when the story first broke. The shares continued falling for a week or so before staging a six-month, 35% rally.

The impact of that "huge" scandal barely even registers when you view a long-term WMT chart these days.

Target (TGT) suffered a major data breach around Thanksgiving of 2013. Press reports just would not let go of the story. Forbes was still calling it a "nightmare" on Jan. 17, 2014. Investors reacted predictably by dumping the stock.

That was a bad move. TGT meandered for about eight months but, by year's end, was up 40% from its early February low. It went on to hit $85.80 by mid-year 2015.

Those three stocks were examples of healthy companies with horrible, real events. The media's worst-case predictions never played out, though. People willing to follow Buffett's classic advice, "Buy when others are fearful" got great trading opportunities.

I held my nose, fought my fear and sold April, 2018, $90 strike price puts on Equifax while the stock was getting pounded on Sep. 14th.

That left me with an additional 13.2% margin of safety if EFX has not yet hit bottom. My worst-case, forced purchase price would be $78 ($90 strike less $12 put premium).

EFX hasn't actually changed hands that low since 2014, when EPS were on track to hit just $3.88. The dividend rate was then $1.00 per year, rather than $1.56.

Standard & Poor's carried a 4-star BUY rating on EFX just ahead of the news release. My break-even price is $56.50 per share below their old fair value estimate.

Your very best trades are usually the ones you are least comfortable with, the day you make them.

I'm hoping that EFX lands in the same pile as BP, WMT and TGT, well before my April 20, 2018 expiration date.

EFX closed on Sep. 15, 2017, at $92.98.

This commentary originally appeared on Real Money Pro at 07:00 on 8/19/17. Click here to learn about this dynamic market information service for active traders.

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