5 Investing Lessons From a Stock Pick That's Lived Up to the Challenge

Almost exactly one year ago I published an article detailing my very best single stock selection for the year ahead. A link to the original column appears below. Here's My Best Stock Pick for the Next 12 Months -- Wanna Challenge It? The stock was American Woodmark , then trading at $47.65. I noted at that time that it was offered at the best valuation of the previous decade, excepting its Covid-panic low of 2020. My $104 target price has yet to be achieved, although fundamentals exceeded expectations since I wrote that article. Anyone who bought AMWD on my recommendation, though, should be quite pleased with their returns. The shares hit $80.27 recently, up a very respectable 68.5% from the quote on Sept. 15, 2022. And there still appears to be plenty of room left to run. Here is my updated take on AMWD -- a year later -- as of September 2023. My current 18-month price target has shifted to north of $140 in response to the much better than expected results since last year. Hitting my new goal would deliver an additional 80% or so by spring of 2025. At its current quote AMWD is offered for a much lower price than it fetched back in 2015 when final EPS were destined to reach only $3.62. The stock trades at a substantial discount to the $148 it hit during February 2018 when EPS were on pace to finish at $6.91. Buying today gives new buyers much more value for their money than at any of AMWD's peaks (red-starred) when it commanded multiples ranging from 18.4x to 33.1 times forward earnings. AMWD has rarely been available any cheaper than it is right now. The two times it did saw the stock surge from $54 in January 2019 to almost $118 within a year, and from the Covid-panic low of $35.30 to $108.80 in about 11 months. The stock had few supporters a year ago even though AMWD had fallen from $108.80 to south of $48 and had solid prospects. Value Line rated American Woodmark a SELL even though its P/E was less than half its historically normal multiple. It assigned the shares its lowest technical rating. Ironically, Value Line thought AMWD could rise by 45% within 18 months and could zoom by 145%-260% by 2025-2027. That is the problem with trying to be timely. Only stocks with good share-price momentum in place tend to attract traders with short-term horizons. Here is Value Line's September 2023, take on AMWD, after the shares rose dramatically. At $80.10 they now rated the stock a best buy while calling it favorable on a technical basis as well. Quizzically, Value Line now says that the shares will likely be 20% lower over the coming 18 months while only fetching 7.3 times its own EPS projection for that period. It also called for much more modest returns over the coming three to five years. That was premised on AMWD garnering only a 7.5x multiple versus its much higher historical average valuation. Go figure. Company insiders obviously ignored Value Line's advice to avoid the stock during 2021 and 2022. Directors and the firm's CEO executed multiple insider buys as shown below while not one insider dumped shares. Value Line is not the only research house to jump on AMWD's bandwagon after its sharp run-up in price. Zacks just put AMWD on its best growth stocks to buy in September 2023 list. Independent research from Morningstar loves the shares now, too. AMWD is rated a 4-star, out of 5, BUY with an estimated present day, as opposed to year-ahead, fair value of almost $100. That price point is far from an upper limit. AMWD peaked between $108.80 and $148.40 during each of the five years stretching from 2017 through 2021. Trailing 12-month EPS are higher now than during any of those years with even better results expected going forward. Quantitatively-based FAST Graphs calls AMWD's typical P/E as 17.76x. Applying that multiple to its FY 2024 and FY 2025 estimates generated a May of 2024 goal price of about $143 and a spring of 2025 target north of $161. Both of those numbers fall well within Value Line's longer-term target range for AMWD. What Are the Key Takeaways From All This? 1. Waiting for positive momentum before buying ensures that you can never buy true bottoms. 2. If data suggest that long-term upside potential is extensive don't worry about being early to the party. The easiest gains are the ones made when initially rebounding from crazy low points. 3. You can always find reasons not to like stocks that everybody else seems to hate. Keep in mind, though, that insiders and others with insight into the stock's true value, are happy to accumulate while most people shy away. 4. Just because a stock has run up a lot, doesn't necessarily make it expensive. With AMWD the already good gains still appear to offer plenty of further upside. 5. Good things come to those who wait. My gains in AMWD took longer to be realized than I hoped for. The magnitude of the profits, though, more than made up for the time commitment. I averaged down many times on AMWD as it got inexplicably cheaper during 2022 and during the first half of 2023. It became my single largest dollar personal holding and remains so today. In addition, I also profited handsomely from short sales of puts and covered call sales along the way.

5 Investing Lessons From a Stock Pick That's Lived Up to the Challenge

Let's follow up on my September 2022 top pick and challenge to readers.

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