This Stock Is a Shining Star, Even in a Bad Market

Most investors shy away from stocks following bad market years. Statistically speaking, though, that has proven to be counterproductive. Since 1974, there were seven major selloffs in the Nasdaq Composite. Five out of seven of the subsequent years turned out positive. The average rebound weighed in at + 40.9% for these volatile stocks. March of 2000 proved to be the end of the internet/tech bubble. Many of those stocks were trading at outrageously expensive valuations. That is one of the two reasons that the Nasdaq Composite failed to rise in 2001. The other big negative that year was the Sep. 11th terror attack, which temporarily shut down all air traffic in America and permanently changed TSA procedures. I would call both those events as outliers, rather than normal market times. Since 1941 there have been eight major yearly declines in the more balanced S&P 500 index. Three quarters of those years (6 of 8) were followed by gains, including 2023 year to date. The S&P 500's repeat loss in 1974 came on the heels of an abrupt tripling in oil prices. 2002's consecutive down year followed the Sep. 11th attacks of 2001. Average gains in the six rebound years were + 27.1% if you include the partial year 2023 YTD number through Apr. 21st. If you agree that we are likely to see a decent year in 2023, why not consider owning shares in a company like Polaris Inc. ? Polaris has a fine long-term growth record and pays a solid and well-covered 2.37% yield. Better still, its embedded value created over the past decade is far under-reflected at the firm's quote on Monday. When shares prices substantially lag fundamentals the situation is almost always resolved via a catch-up move higher in the stock price. What is PII worth? A normalized price-to-earnings runs about 17.2-times accompanied by around 2.17% in yield. As I am writing PII sports a below average multiple of just 10.5-times Value Line's estimate of $10.45 in EPS. The recently raised dividend now provides an above average 2.37%. PII's valuation is very inexpensive based on all historical data. The only two times it sold for lower P/Es were at the Covid-panic bottom and during last fall's final low for 2022. Both those instances saw PII rise substantially within months. A simple regression-to-the-mean P/E could easily justify a goal price of $170 - $180 within six to 12 months. That goal range is not far-fetched. Polaris commanded peaks of $146.40 to $159.30 during each of the three years 2013 through 2015 on EPS that ran from just $5.40 to $6.75. Yahoo Finance agrees that PII is undervalued. A return to a more typical valuation could send the stock up to $172 by this time next April. Independent research house Morningstar concurs. Morningstar labels Polaris a 4-star, out of five, buy. Morningstar deigns to provide year-ahead goal prices but does let us know what it sees as present-day fair for each stock it covers. For PII, that number is $175, about 62.2% above its current quote. Morningstar also noted Polaris' wide business moat, which limits new competition in their markets, and management's exemplary rating regarding capital allocation. Shorting naked puts on a proven growth stock like Polaris is a low-risk way to scalp some decent premium dollars with only a small chance of ever being forced to buy the shares. Actual pricing on the Dec. 20, 2024 expiration date $100 to $115 strike prices, with PII at $109.72, are shown below. Worst-case, forced purchase prices on the examples above would range from $86.50 for the $100 strike price puts to $95.00 on the more aggressive $115 strike price put. Polaris has not traded south of $91.90 since the dark days of Covid-ravaged 2020. Across the board, PII's fundamentals are much stronger now that they were back then. History says 2023 will likely prove to be a fine year for stocks. Polaris appears to be a good way to play that theory. Buy some PII shares, short some PIII LEAP puts, or consider doing both.

This Stock Is a Shining Star, Even in a Bad Market

Let's see why poor market years prelude better ones, and why Polaris looks bright.

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