Good Things Happen on a Honda

Do not worry about that Great January Jobs Report. Friday saw a huge initial selloff after an unexpectedly robust January jobs report was released. Traders were sure that the 500,000-plus new jobs indicated a much stronger economy than perceived, which would lead to more rate increases and higher interest rates. How could Fed Chair Jerome Powell have sounded so dovish last week in the face of that? The answer is ... the number was not accurate. It was highly inflated by seasonal adjustments that do not necessarily reflect the truth. Why would that report have sounded so optimistic? Call me skeptical, but it came just days before President Joe Biden's State of the Union address. Was the adjusted number, which is still subject to restatement, have been manufactured to give the President bragging rights about job creation? We will only know that after final tweaks to the report come in later. The chart below definitively refutes the assertion of major new job gains last month prior to the non-objective adjustments. Fretting about Fed actions based on the headline job gains is probably going to turn out incorrect if you trade based on it. With individual companies there are no seasonal adjustments to earnings per share. We simply compare each quarter's data with the same time period a year earlier. That automatically adjusts for seasonality without adding fudge factors that can be used to distort reality. Government data should be treated the same way. Now buckle up for today's stock pick. I have not written about Honda Motor Company in a long time. Its latest full-page report was in the current Value Line edition, though, and I went over it to get a fresh view. HMC has not been a stellar performer over the most recent decade, but it did add value across every major business metric. What is really striking is that HMC shares are now substantially cheaper than they were 10-years ago, even after adjusting for dividends collected. How many other things can you think of that are cheaper than in 2013, while offering more value than ever before? Since 2012 the stock's average P/E registered at 11.5-times, accompanied by around 2.86% in yield. As of Wednesday, HMC was offered at just 6.6 times projected fiscal 2023 EPS, while paying 3.6%. There was just one instance of seeing HMC at a lower valuation since 2012. That came at the exact Covid-panic low in March of 2020. Buyers at that moment saw the shares run from $19.40 to $33.40 (+72.2% plus dividends) over the next 15 months. Simply rebounding to 10-times fiscal 2023 EPS estimate of $3.70 would take HMC back to $37, providing almost 55% in total return if it takes a full year to get there. That seems a reasonable goal and is far from an upper limit. HMC often commanded much higher multiples than 10-times from 2012 through 2015. The stock may be down, because fiscal 2022 is going to be a down earnings year. Fiscal 2022 fourth-quarter results are due on Friday. They are likely to trail last year's fourth-quarter tally. After that, though, things should start looking much better. The next four quarterly results are expected to show decent improvements over last year's weak numbers. That should get investors more enthusiastic about owning the shares. A 10-times multiple on EPS rising 17.5% is not a stretch at all. If anything, it might prove too conservative an assumption. Research house Morningstar agrees. They label HMC a 4-star, out of 5, buy. It sees present-day, as opposed to year-ahead, affair value as $32, about 30.8% above today's quote. Fast Graphs research says HMC's average multiple is 12.55-times. They look for HMC to post $3.57 in fiscal 2023 EPS. If HMC can return to 12-times earnings it could reach $42.84 by this time next winter. Option-savvy traders who wish to simply nibble at the edges with HMC might wish to short naked puts out to July 21, 2023 using strike prices of either $22.50 or $25. Actual pricing on those, with HMC at $24.39, are shown below. Worst-case, forced purchase prices dropped to either $21.75 or $23.35, respectively. That provided modest downside protection while offering decent up front premium income. Honda might not be the world's most exciting company, but at today's quote it offers outstanding reward vs. risk characteristics. You could trade now, ahead of Friday's earnings report, or wait to see if HMC goes just a bit lower on the last of the negative year-over-year comparisons.

Good Things Happen on a Honda

The old ad slogan for this automaker is right -- and means a great deal amid this economy ...

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