Take the Escalator Up With Children's Place

In the short run, markets can do anything they please. There is often no rational way of accounting for the craziness you might see. Over the long-term, though, almost every stock reverts back to its true value. Once you accept that present-day share price movements can be unrelated to reality, you begin to view discrepancies between value and price as positive events. Grossly overpriced stocks give you the chance to sell at outlandish levels. Wildly underpriced shares offer the opposite, a chance to own them at what might be fractions of what they are already worth. Children's Place is clearly now in the second category. The firm reported fiscal fourth-quarter results last week that were nothing short of outstanding. Earnings per share jumped to new all-time highs for both the quarter and the full fiscal 2021 that ended Jan. 29. Adjusted EPS came in at $13.40. The old record weighed in at $7.91. Other highlights of the recently completed fiscal year are detailed here. Management refinanced debt, extending maturities and drastically cutting future debt service expense. Share buybacks trimmed the company's outstanding shares to just 14 million. Eight years earlier than figure was more than double, at 28.5 million. Less shares outstanding suggests much higher EPS are possible with a smaller share count. A new buyback authorization for $250 million in additional repurchases was announced last November. Unprofitable units were closed, removing their losses from future years while freeing up resources and management attention for better uses. Mall-based stores have been pared back substantially as off-mall locations have blossomed. Online sales are growing rapidly and cost efficiencies have created higher profit margins on those revenues. Executives are doing everything you'd want them to be working on. Based on those stellar results and actions you would have guessed that PLCE shares would be flying higher. They did jump to $113.50 last November after a stellar third-quarter report. Since then, though, PLCE slumped to close on Friday at just $51.53. At that quote PLCE was offered for less than 3.9-times trailing earnings. How insane is that? Since the end of fiscal 2014, cash flow per share almost tripled and EPS rose by greater than 336%. Continuous shareholders saw no gains on the shares in nominal terms in those full eight years and only 8.15% including dividends. Buyers right now are getting tons of already created value at about the same absolute price as on Mar. 11, 2014. Situations like that are typically arbitraged away very quickly via huge share price increases. If the market doesn't do that soon PLCE might be a prime target for a buyout or a going private transaction which would speed up the process. Not long ago Tenneco (TEN) jumped from $9.65 to north of $19 in one day on a buyout deal at $20 per share. Last March, arts and crafts retailer Michael's (previously MIK), which had fallen as low as $1 - $2 during the Covid-panic, was taken private for $22 per share. Severe mispricing is common. Rather than try to explain it, why not simply buy fine stocks when they are selling for well under any rational evaluation of their true worth? I'm only using a 14 multiple on Value Line's fiscal 2022 projected EPS in figuring that PLCE could be north of $156 by this time next winter. That is not far-fetched. PLCE changed hands at $161.60 in early 2018 on fundamentals far below what are in effect now. Traders had chances to take profits in PLCE at $111.20 to $161.60 during five of the last six years, including 2022 year to date. Yahoo Finance calls PLCE undervalued. Its 12-month target price of $82.20 appears way too conservative though. It assumes just an 8-times multiple on what it views as fiscal 2022 EPS. PLCE's average pre-Covid P/E ran double that, at about 16.3-times. Even so, simply reverting back to the goal price would deliver almost 60% returns from here. Remember, too, that PLCE changed hands above $113 just four months ago and there has been nothing but great news since. Research house Morningstar does not offer analyst coverage on PLCE right now. Its computer-generated present-day fair value estimate, however, sits at $84.62. Morningstar is saying that PLCE could rise by 64.2% just getting to what it believes it is worth right now. Surprisingly, that wide discount to its own fair value estimate didn't even warrant a buy-rating. I can't explain that, but am looking at today's major undervaluation as a gift that should not be refused. FastGraphs is a quantitatively focused equity research service. Its projected year-ahead goal prices for PLCE are more in line with my own. FastGraphs calls Children's Place's normalized P/E as 16.07-times. If PLCE reverts back to that typical valuation they see it hitting north of $180 by Jan. 31. It the shares only fetch 15-times projected year-ahead EPS their 12-month goal price still comes in at $168.74 per share. Both FastGraphs and I see the potential for PLCE to double or triple within a reasonable 12- to 18- month time horizon. If you buy into our way of thinking selling in-the-money naked puts out to Jan. 19, 2024 makes a lot of sense. The graphic below details actual prices for the $60 - $100 strike price LEAP puts when PLCE was trading at $51.53. Shorting any of those somewhat aggressive looking puts is actually not too risky at all. Worst-case, forced purchase prices dropped to between $38.00 and $46.30 per share, offering margins of safety of up to 26.2% vs. last week's already cheap closing price. Future stock market action can never be guaranteed. We can know for sure, though, that owning PLCE shares at even the highest break-even price shown ($46.30) would have been a winning position 100% of the time dating back to before the start of 2021. Potential gains on each 100-share commitment ran from a low of $2200 to a high of $4630. Worst-case scenarios would simply force you to own a great company for lower than the absolute lows of the previous 15.5 months. That is a kind of risk/reward ratio you don't see often. How cool is that? Owning PLCE shares outright offers unlimited upside with no preset time holding period. Selling Jan. 2024 expiration date puts provides finite, but substantial immediate income with around 22-months for the market to come to its senses regarding what PLCE should be selling for. I find it hard to imagine that Children's Place will not be much, much higher in relatively short order.

Take the Escalator Up With Children's Place

Let me show you why PLCE is still my second largest dollar holding.

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