Let Me Show You How to Play This Stock Amid Market Ups and Downs

The chart below highlights the waves in the S&P 500 over the past year. There were six or seven major cyclical swings in the index that took it from overbought to oversold and back again. The most oversold of those periods took place in mid-June. We then saw a major rally that lasted through mid-August. At that point the S&P 500 was near its most overbought status since the previous summer. Out of the blue, market sentiment collapsed after that. As of Aug. 30, the SPX's oversold reading was nearing its worst of the past 12-months. We started Wednesday's trading more than two standard deviations below normal. That suggests an ultra-high probability of a renewed surge higher. In that situation, you should be using general market weakness to buy stocks you like and/or sell puts on those shares. There's a better than 95% chance you'll be rewarded rather quickly. Now for a specific recommendation based on both long-term data and a short-term very positive quarterly report that was released pre-market on Aug. 31. Designer Brands has been a favorite of mine over the years. I made huge gains buying it during the Covid-dictated store closure period in the first half of 2020. DBI was losing money back then but had an enviable record of steady profits year after year prior to 2020. Earnings per share ranged from $1.46 to $1.88 each year from fiscal 2011 right through fiscal 2019. Despite the proven earnings power shown above, at the worst of the Covid-panic selloff, DBI was available for south of $3. That was less than two times normalized EPS. Fiscal 2021 proved to be a huge rebound year. EPS shot back up to $1.69, right in the middle of the previous range. By May of 2021, DBI once again traded above $20. Fundamentals have only improved since, yet the shares retreated from $20.50 in the spring of 2021 to $11.20 in March of this year. Company insiders didn't miss their chance to buy the pullback. There were five significant dollar insider buys against just one (smaller) insider sale during 2021. Total purchases represented close to $19 million. Much of that buying came from the firm's CEO. The average cost was $13.934 per share. Those trades worked out well. DBI was recently as high as $19.38, although it sold off with the broad market back into the $16 - $17 range. The company's end of July quarterly report was way better than consensus estimates. Sales and earnings both hit all-time records for that quarter. Full year guidance was reset higher, to a mid-point of $2.10 per share, up from $1.95. Somewhat surprisingly, DBI failed to get a large initial bounce on all that great news. As of 10:39 a.m. it was still offered at just $16.57. What is DBI really worth? In the eight years immediately preceding the Covid-year 2020 DBI typically fetched about 16.8-times earnings. At peak moments, when traders were hot to own it (red-starred below) DBI often commanded P/Es above 20-times. Previous best entry points (green-starred) in 2012, 2014 and 2017 rewarded traders who bought at between 9.9-times and 13.9-times forward EPS. Right now its P/E is only 7.9-times, less than half its old normalized level. Simply rebounding to a still less than normal 14-times multiple suggests DBI could bounce back to $31.50 or so by Jan. 31, 2024. That goal price would deliver 90% upside plus any dividends collected along the way. My target price is not farfetched. DBI frequently traded for $30 - $40 in years when EPS were well below what ifs now in effect. Research house Morningstar thought DBI was worth $21.51 at present even before the fine quarterly report and guidance range increase. The almost 30% upside they indicated will almost certainly get boosted in the near future. Owning DBI shares outright is a good plain vanilla way to lock in a decent 1.21% yield and plenty of potential capital gain. Option-minded traders could also benefit via sales of naked puts out to April 21, 2023. Actual pricing on some of DBI's options, with the stock at $16.73, can be seen below. Selling DBI's Apr. 2023 $17.50 puts for $3.50 only commits to owning DBI at a net cost of $14. Shorting DBI's April 2023 $20 strike price puts at $5 offers a far-from-scary worst-case, forced purchase price of $15. The call prices shown above illustrates how optimistic some people are on even the short-term prospects for DBI. Current holders of DBI could pocket $1.20 per share for standing ready to sell at $17.50 by Oct. 21, 2022, less than two months from today. A net exit price of $18.70 sounds a bit low to me but it represents a $1.97 per share upturn (+11.8%) from $16.73 in just 51-days. Those wanting to sell higher, and willing to wait longer, could collect $1.50 for selling $22.50 covered calls out to Apr. 21, 2023 or $1.00 for committing to sell at $25. Think of those call premiums as synthetic dividends which are paid in advance. Being forced to give up your DBI at net prices of either $24 or $26 would not be a bad result even if the stock goes even higher. Why even think about paying up for high P/E stocks when fine companies like DBI are going begging at single-digit valuations?

Let Me Show You How to Play This Stock Amid Market Ups and Downs

As the S&P goes through its major cyclical swings, we can see how to use these moves as a guide to the future for stocks like Designer Brands.

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