Form an 'Alliance' With This Cheap Stock

Sometimes, stock market action simply cannot be explained. That certainly appears to be the case with shares of Alliance Data Systems right now. From 2010 through this year ADS has been a stellar growth company. If consensus estimates for 2020 prove accurate, EPS will have more than tripled. Ditto for cash flow per share. ADS paid no cash dividends ten years ago. They delivered $2.52 per share in 2019 with another rate increase likely soon. Alliance's shares did well, rising over 90%, but total return of 95% lagged value created by a wide margin. That leaves plenty of room for a catch-up move to arbitrage away the discrepancy between the current quote of just $102.83 and ADS' true value. The stock hit an all-time high of $312 in April 2015, a year when EPS were on the way to $15.15. Investors ponied up more than 20-times earnings to own it back then. After selling a division for more than $4 billion last year management tendered for 5.05 million shares at a final price of $148.50. That level only attracted about 22.6% of all shares outstanding as many holders agreed with management and felt the stock was worth much more. Surprisingly, the stock drifted way lower. It finally bottomed at $99.20 during October of 2019. What is ADS really worth? Alliance's multiple varied quite a bit during the past decade, ranging from 8.5-times to 21.1-times. Its average level was 14-times. A typical yield, since 2017, ran about 1.23%. As of Friday, ADS was available for only 5.0-times Value Line's 2020 EPS estimate for it while yielding 2.45%. Even a partial regression-to-the-mean valuation rebound supports a year-ahead target price of about $245. Wow! That goal is not far fetched. ADS peaked at higher than $245 during each of the six years from 2013 right through 2018. It hit $183 during 2019. Projected EPS for this year and next are better than during most of the periods when the stock was way, way higher. No wonder most shareholders were not interested in tendering for $148.50. Traders tend to get excited when companies report positive year-over-year profit growth. That didn't occur during 2019 while the shares were sinking. That situation appears ready to reverse, starting with Q1 2020 and continuing throughout 2020 and beyond. Building positions in ADS now should start paying off quickly and in a big way. Yahoo Finance, too, sees ADS as undervalued. Its 12-month target of $127 seems awfully conservative. It assumes ADS will command just a 6.3-times multiple on Yahoo's $20.10 2020 EPS estimate. Hitting even that modest goal would generate almost 26% in total return. Independent research house Morningstar is more bullish on ADS than Yahoo. The firm calls it a 4-star, out of 5, buy while noting its very low price-to-earnings, high yield and low price to sales ratio. ADS' high beta means it can rally quickly once traders start warming up to the stock again. Morningstar deigns to provide year-ahead target prices. It does, however, indicate what it sees as present-day fair value for each stock it covers. For ADS that figure sits at $146, a full 42% above its current quote. Longer-term prospects suggest hearty appreciation potential. Value Line sees Alliance's EPS growing to $33.65 within five years, pushing the share price to between $240 and $365. From its outrageously low valuation and elevated yield ADS offers tremendous upside with only a modicum of risk. Buy some shares, collect some dividends while waiting for the market to come to its senses. ADS is among my largest personal dollar holdings.

Form an 'Alliance' With This Cheap Stock

Alliance Data Systems is inexplicably inexpensive, and ready to rumble.

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