Bear Markets Can 'Furnish' Great Chances to Buy

Bear markets are painful to live through, but offer the best chances for future gains. Specialty retailer Williams-Sonoma provides a perfect example of a proven growth stock that is only available at a great price during uncertain times. In the four fiscal years ended Jan. 30, 2022 every major metric grew nicely. Per share cash flow more than tripled. Earnings per share surged by 319%. Shareholders are happy. Even after a substantial pullback, from $223 last fall to about $136 on Wednesday, WSM provided total return of greater than 217% in exactly five years. The firm is totally debt-free, pays a well-covered 2.29% dividend and rates an A+ financial strength rating from Value Line. WSM's above average share price volatility makes it a good trading vehicle as well as a fine long-term holding. Pre-Covid, from 2015 through 2019, WSM averaged a 16.0-times multiple, accompanied by about 2.76% in current yield. At its Wednesday quote of $136 its current year P/E is just 8.4-times and its yield is better than typical, at 2.29%. Assume a conservative 14.5-times this year's projected EPS and you'll come up with a winter of 2023 target price north of $234. That implies 72% upside, plus dividends, from here on this top-quality name. WSM hasn't posted a negative year-over-year EPS comparison since the very dark days of 2008. Dividends have followed suit, rising each year since 2010. There is plenty of room for further payout increases. From 2013 through 2019 the payout ratio (all dividends as a percentage of net profits) ran from 40% to 45%. Based on current estimates this year's payout ratio is less than 20%. Yahoo Finance calls WSM undervalued. Research from Morningstar is even more enthusiastic about WSM. It assigns its highest 5-star, buy rating to the shares. Anything below $161 would have qualified WSM for that honor. Being available almost $25 per share cheaper than that trigger price is truly remarkable. Morningstar feels Williams-Sonoma is worth $230 right now, not 12-months into the future. That view is not crazy. WSM was almost that high last November before blowing way past estimates and posting record EPS of $14.75 in fiscal 2021. Value Line sees even better EPS, of $16.20, in fiscal 2022 based on its brand new full page report on WSM dated this week. Buying WSM shares outright is the plain vanilla way to make money with the stock. Option-minded traders can now get paid terrific premiums for selling naked puts out to Jan. 19, 2024. Actual pricing on near-the-money LEAP puts at $140 and $150 strikes, with WSM at $136.36, are shown below. I also included covered call pricing for slightly out-of-the-money calls at $150 and $160 to show that premiums to buy WSM for the same expiration date are also fetching huge premium dollars. Worst-case, forced purchase prices on the $140 and $150 strike price LEAP puts dropped to either $106.80 or $111.50 respectively. The lower of those implies a current year P/E of only 6.6-times. The more aggressive one stills weighs in at just 6.9-times fiscal 2022's EPS estimate. Downside protection equals either 18.2% or 21.7% depending on the strike price employed. Future stock market action can never be guaranteed. That said, owning WSM below $112, the break-even on the Jan. 2024 $140 put, would have been a winning position about 95% of the time dating back a full year. That was during one of the worst bear markets in modern history. Williams-Sonoma has proven itself to be a reliable growth stock that typically merits a much higher valuation than it does today. Since the end of 2010 about 35% of the entire float has been repurchased, all via internally generated funds. That trend is likely to continue adding to EPS growth as the shares outstanding continue to decline. The future appears bright. Management was early to develop a huge online sales component to augment its bricks and mortar stores. WSM has rarely been available at a larger discount to its true worth. Buy some shares, sell some puts or consider doing both.

Bear Markets Can 'Furnish' Great Chances to Buy

Let's see how uncertain times like this can lead to opportunities in companies such as Williams-Sonoma -- a true 'left to right' growth stock.

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