How to Stay Sane in an Insane World

The first trading week of 2019 was especially crazy. After the close on Jan. 2, 2019, Apple pre-announced disappointing numbers for their fiscal first quarter based on a slowdown in the Chinese economy. AAPL tanked after-hours and weakness persisted into Thursday's opening. Apple's suppliers were hit hard as were other stocks that do business in China, like Caterpillar , FedEx and Boeing . That was understandable. What wasn't clear was why traders started selling everything. The market fell over 300 points in the first few minutes then faded further. By 4 p.m. the DJIA was off by 660 points. Breadth was horrible. Friday morning's Wall Street Journal showed a decidedly negative front page headline (see below) along with tons of data supporting their view that the American economy might be on the verge of a recession. Investors, already shell-shocked by the previous day's scary plunge, were fearful of much worse to come when trading resumed. Minutes later, though, a much better than expected jobs report was released. Futures picked up dramatically and all those negative thoughts were banished. Friday saw the DJIA gap up by over 200 points on the opening. It never looked back. By closing time the index had gained almost 747 points. The weekend edition of the Wall Street Journal featured a front page story that pretty much contradicted everything it wrote about just one day earlier. No wonder so many people seemed paralyzed, unwilling to buy or sell at all. When business sentiment winds can shift that quickly, why even bother trying to trade on macro-economic news? Instead, focusing on the actual worth of individual stocks appears more productive. Let's look at Realogy as an example of an obviously, but unjustly, beaten up stock, offered at its cheapest valuation ever. RLGY's earnings per share have been rising steadily since 2014. 2018 was on pace for $1.70 versus $1.57. Value Line thinks Realogy can earn over $2.00 this year. RLGY's somewhat limited time as a public company makes knowing a fully normalized P/E problematic. Throw out Realogy's 2014 and 2015 P/Es as not meaningful and RLGY's typical multiple has run about 17x. A yield of around 1.33% appears normal. Applying a 17 multiple to Value Line's 2019 estimate for Realogy suggests the shares could rebound to north of $35 within a year. Reverse engineering the current 9-cent quarterly dividend to 1.33% supports a 12-month goal of about $27. Both numbers appear quite reachable. RLGY's trailing 12 month high was $28.07. It hit $35.19 back in the summer of 2017, when EPS were on pace to finish at $1.57, not $2.10. Note, too, that RLGY fetched peak prices running from $37 to $55 during each year from 2012 through 2016. Don't simply trust me on this. Independent research outfit Morningstar used different methodology but reached a similar conclusion on Realogy. It merits Morningstar's highest, 5-star, buy rating. Morningstar does not publish 12-month price targets. They do, however, let us know what they feel is the present day fair value of each stock they cover. For Realogy that number sits at, what I'd call, an ultra-conservative $22.71 per share. Reaching even that level would provide a 41% boost from RLGY's Jan. 4, 2019, closing quote of $16.08 plus any dividends earned along the way. Investors with longer time horizons might end up doing even better. Value Line expects Realogy's EPS to grow to $4 over the coming three to five years. Even a modest P/E ratio on those profits would support huge gains from here. Realogy hit bottom at $14.25 on New Year's Eve. It's up almost 13% since then meaning today's traders no longer have to fret about the falling knife scenario. Buy some shares while the price remains seriously undervalued. There's a good chance at a double or better jump over the next 12 to 18 months.

How to Stay Sane in an Insane World

Focusing on the actual worth of individual stocks is the way to make money.

Columnist Conversation

This Weekend on Real Money

Very Good Quarterly Numbers From Bassett Furniture (BSET)

First-Half Results - Putrid; Second Half Results - Likely to Be Much Better

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.