Good Things Come to Those Who Wait

In the short-attention world we live in, it's really tough to be a patient investor. Nobody likes to see the broad market rallying while one of their large holdings is simply marking time. That feeling is exacerbated when repeatedly good quarterly reports are greeted by the market with a big yawn. If traders can't warm up to that dog when it's doing well, why not dump it for something more exciting? What's the real answer to that question? Good things come to those who wait. Undervalued shares can get even cheaper in the short run but eventually they play catch up, running much higher. Those upward surges can happen in a hurry, leaving those not already in, with little chance to catch the wave. The longer the period of underperformance, the greater the magnitude of the rally can be. Healthcare industry giant McKesson Corp. provides a perfect example of this type of stock. MCK hit an all-time peak north of $243 about four years ago, when its EPS were on track to be $9.84. Fiscal year 2018 (ends March 31, 2019) EPS are expected to come in near $13.60, about 38% higher than when the shares topped out. Over that same time period annual dividends climbed by 44.44%, from $1.08 to $1.56. All that good news hasn't helped the shares... yet. As of Monday Feb. 11, 2019, MCK was available for just $130.43, about a 46% discount to its 2015 pinnacle. McKesson is top quality. It rates highly in terms of earnings predictability as well. From 2011 through 2018, MCK's average P/E ran about 14.5x. A typical yield was around 0.76%. At $128.60 the stock's forward multiple was just 8.9x while its current yield registered a much better than normal, 1.21%. Those metrics are right in line with MCK's five previous best entry points (green-starred below). Each of those moments allowed traders to buy MCK just before very tradable run-ups. Two of the three should have sold moments reflected much higher than average valuations, accompanied by historically sub-par yields. MCK figured to drop from those elevated levels. What is McKesson really worth? A simple regression-to-the-mean valuation suggests a 14-month target price of $210. That leaves about 62% upside from the stock's recent quote. It's not a crazy goal. MCK topped out above that price during both 2014 and 2015 and it's clearly worth more today. Don't just take my word on this. Independent research firm Morningstar, sees things the same way. They assign MCK their highest, 5-star, buy rating while noting the firm's low P/E, wide moat and significant undervaluation. Morningstar does not issue 12-month target prices. It does, however, show their estimate of present-day fair value for each stock they cover. With MCK, that figure stands at $210 per share, exactly matching my conservative goal price. MCK's long-term outlook appears stellar. The aging of America bodes well for the healthcare related businesses which MCK serves. Value Line's three to five year target price range weighs in from $280 to $375 based on projected EPS growth to $20.50 and a return to a more typical P/E multiple. McKesson's fundamentals have never looked better. It is demographically favored. The current low valuation implies huge upside potential. All that's missing is share price momentum and the patience to wait for the next upturn. Buy some shares, sell some long-term puts or consider doing both.

Good Things Come to Those Who Wait

Undervalued shares can get even cheaper in the short run but eventually they play catch up, running much higher.

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