This Could Be 'The Place' for a Double or Triple

Finding hidden gems is very satisfying. By definition, stocks like that are unloved and unappreciated by most other investors. You can only recognize them when you do the analysis and clearly see the truth. That gives you the conviction to plunge in, and win big. Specialty retailer Children's Place now meets all the requirements to be a personal major dollar position. Since fiscal year 2014, ended Jan. 31, 2015, PLCE has posted enviable numbers. That period includes the Covid-crisis of 2020, when government imposed store closures caused a big loss. In the end, though, that painful period forced management to rid itself of less profitable locations and vastly improve its online sales channels. Fiscal 2021 had a lot of tailwinds. Stimulus checks put money in parents' pockets. So did monthly child tax credits, until the program expired. Profits surged to an all-time record $13.40 per share. The previous best year showed EPS of $7.91. Understandably fiscal 2022's profits will regress a bit. Value Line now sees about $10 per share. There's nothing shabby about that. Hitting that level would represent the second best annual performance to date for PLCE. The 2014 - 2022 growth table below is calculated using this year's estimate, not last year's unrepeatable peaks. Amazingly, the stock today sells for very close to what it did exactly eight years earlier. That is despite a more than tripling in both per share cash flow and EPS. Management retired greater than 35% of the end of 2014 share count during that period giving PLCE major upside potential when investors regain their senses regarding these shares. Increased demand will run smack into a much smaller supply of stock to buy. These high volatility shares (beta: 1.65) move around quickly in both directions. Sharp buyers in 2020 got the chance to ride PLCE from under $10 to north of $113 in under two years. Great entry points during 2014, 2015 and 2016 (green-starred below) saw PLCE trading for 13.0 to 14.5-times earnings just ahead of major upturns. As of Thursday, Children's Place was offered for under 5-times this year's estimate. A typical multiple for PLCE ran about 16.3-times in the six pre-Covid years. Even a partial valuation recovery to 12-times could easily justify a goal price of $120 or so. Reaching that rational price target would deliver about 158% gains from today's quote. PLCE top ticked at $161.65 way back in 2018 on EPS of $6.75 to $7.91. As noted earlier, PLCE changed hands as high as $113.50 just nine months ago. Short-term market action can be very illogical. PLCE made a 2021-2022 low of $36.97 just a month ago. It was as high as $48.31 intra-day on Thursday, about 30% higher than that very recent nadir. High beta is a good thing when you own cheap stocks. They can move up dramatically and quickly. The next two graphics show what GuruFocus and FastGraphs research services had to say about PLCE on June 17. GuruFocus saw present-day fair value as $93.34, offering about 127% in upside. FastGraphs projected $150 for PLCE by next winter, at the end of fiscal 2022. Yahoo Finance takes a very conservative position on PLCE while still calling it undervalued. They see PLCE reaching $63.40 by this time next year, up about 36.3%. I think that's a laughably low goal as it assumes just a 6.3 multiple on this year's estimated earnings vs. PLCE's historically typical 16.3 P/E. Even the low-ball goal suggests a very respectable 12-month return awaits. It is far from an upper limit. Options premiums on PLCE reflect the extreme volatility and differences of opinions regarding Children's Place's future prospects. The following image shows actual bid-ask spreads on PLCE's Jan. 20, 2023 expiration date options, with PLCE at $46.51. Call buyers were willing to pay up for $75 to $100 strike price calls. Put buyers were ponying up big bucks for the right to sell PLCE to others at net prices as low as $35.30 or so via owning Jan. 20, 2023 $40 puts. Knowing there are large premiums on both sides, here's a nice play for risk-averse option players. Set up the following Jan. 20, 2023 expiration date $45 strike price buy/write combination. That involves purchase of at least 100 shares of PLCE, while shorting one covered call plus one naked put, each using $45 strike prices. When executed in margin-type accounts the money taken in via the option sales can be used to help pay for the shares purchased. If held through expiration day there are just two ways this combination can play out. PLCE will either close at $45 or higher, or below $45. If the former situation holds true the following best-case scenario will be in effect. You'd pocket a nominal 48.95% cash-on-cash return in less than six months. That annualizes at more than 105%. It occurs even if the stock goes absolutely nowhere since PLCE was $46.51 as of trade inception. How cool is that? Outright buyers of PLCE at $46.51 would need to see it move to $69.28 per share to capture the same 48.95% return. What if PLCE closes under $45? If so the worst-case scenario detailed next would apply. Barring a major collapse, though, even that appears far from scary. You'd end up with a doubled-sized position in PLCE, but at an average cost of just $37.61 per share. Any drop of less than 19.1% would allow for immediate liquidation for at least a small profit, and perhaps a pretty substantial one (if PLCE closes not far below $45 on expiration day). There you have it. Children's Place offers substantial upside and somewhat low risk for those willing to tolerate volatility. Buy some shares, short some naked puts out as far as Jan. 19, 2024 if you like, or consider setting up full buy/write combos.

This Could Be 'The Place' for a Double or Triple

Children's Place offers substantial upside and somewhat low risk for those willing to tolerate volatility. Here's a strategy to play the stock.

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