Get in on the Groundfloor of This Stock as Market Builds Strength

Two market indicators bode very well for stock performance from now through year-end and beyond. The first is the contrary indicator of market action launching from periods of extreme public pessimism. Equities do best when most people feel the worst about future prospects. The American Association of Individual Investors sentiment survey is published each Thursday morning. As of Sept. 8 bullish respondent weighed in at under 20%. Historically, periods like that make for substantial gains over the following 12-months. Conversely, reading of more than 60% bullishness typically proceeded negative 12-month forward returns. The fact that so many traders are now feeling feeling down and out suggests strength to come. The second factor is the long-term trends of mid-term election year markets. Most of the time those years do only so-so compared with all years (+4% to+ 5% versus + 8% to 9%). The good news is that most of those gains were heavily skewed toward the fourth quarter, which often sent shares from negative levels to reasonable profits. Seasonality is now on our side rather than working against us. I'm not a big fan of index investing. I'd much prefer to seek out the very best bargains, which are primed to far outperform the averages. Here's one of my current favorites and the reasons I love it so much at present. Interface is the world's No.1, by market share, manufacturer of carpet tiling. For many years it commanded premium valuations of greater than 20-times earnings. Results since 2014 have been impressive, as noted below. If this year's second half of the year estimate proves accurate, EPS will have doubled over those eight years. Despite that the shares are now offered at a substantial discount to the absolute price back in 2014. Today's buyers are getting twice the value for 38% less than on Sept. 11, 2014. That can only happen due to P/E compression. That sets things up for a major Catch-up move higher. What is TILE really worth? From 2014 through 2021 Interface had an average P/E of 16.2-times. There were five outstanding buying opportunities during that period (green-starred below). Throw out the momentary Covid-panic low of 2020 and subsequent, very tradable, rallies were launched from multiples ranging from 10.3-times to 16.6-times. The March 2020 nadir came at just 4.5-times what turned out to be that year's final EPS. Smart/lucky buyers near that bottom saw the stock shoot from $5.10 to $18.03 (+253%) within 18-months. TILE closed on Friday Sept. 9, at just $10.59 after carving out a new 52-week low of $10.13 a day earlier. Last week's closing quote represents just 8.5-times this year's estimate and an even lower 6.8-times its 2023 projected EPS. Contrast those figures with its seven should have sold moments since 2014 (red-starred) when traders ponied up from 15.4-times to 35.8-times earnings. Assume just a partial valuation rebound to more typical 16 multiple and TILE could easily rise to nearly $25 by the end of 2023. That implies greater than 135% in upside plus and dividend income collected, while you wait for the market to regain its senses regarding the stock. My goal price is not farfetched. Interface peaked at from $16.61 (this year) to as high as $27.17 back in 2015. All but one of those years saw final EPS less than what is now projected for 2023. TILE exceeded $25 during three of the most recent eight years. Yahoo Finance's data looks for 31.9% year over year earnings growth for TILE in 2022 and an additional jump of 25.8% next year. Shouldn't performance like that merit much higher than a single-digit multiple? Yahoo Finance's 12-month goal price of $20 only assumes a 12.8 forward multiple, suggesting it is overly conservative. Even so, simply hitting that modest target would deliver a stellar 88.9% total return from here. Morningstar research sees TILE's present-day, as opposed to year-ahead, fair value as $14.36. Once again that seems too low based on the fact that fundamentals are improving rapidly and TILE changed hands at north of $18 as recently as Nov. 8, 2021. TILE ticked up to $15 during both March and June of this year just months ago. Morningstar's 4-star, out of 5, Buy rating would have been 5-stars early in the day on Sept. 8. Quantitatively based Fast Graphs research service calls a normalize P/E for TILE as 21.6-times as they count back further than 2014 in calculating it. Projected year-end 2022 and 2023 price targets come to $18.75 and $22.95 respectively using much more conservative assumptions of just 15-times projected EPS. How can you not love a stock with such high potential gains? Owning TILE shares outright is the plain vanilla way to play for unlimited upside. Option-savvy traders might also wish to sell some naked puts out to Apr. 21, 2023 expiration dates at $10 to $15 strike prices. They could also take a flyer on purchase of call options at $10 or $12.50 if they believe, as I do, that TILE could make a very big recovery by then. Actual pricing on those options, with TILE at $10.59, are shown below. Worst-case, forced purchase prices on the puts are illustrated below. Margins of safety ranged from 1.8% on the deep-in-the-money $15 strike to as high as $14.5% on the very low-risk $10 variety. Buying call options is always risky. You could lose up to 100% of all premium dollars if things go badly. You'd need to see fairly substantial gains on TILE by April 21, 2023 just to break-even if held through expiration day. Shorting deep in the money $15 puts is a backdoor way to play TILE's upside without any initial cash outlay. That said, if things go well, as I predict, the $2.20 or $0.80 per share call premiums paid could turn out to be huge winners as noted next. TILE's April 2023 $10 strike price calls would begin to be profitable after it exceeds $12.20. The $12.50 calls, bought for $2.20, would start making money once TILE exceeds $13.30. Call buying is a high-risk, high potential gain game more similar to lottery ticket buying than serious investing. Both could lead to a total loss of your initial outlay or exciting gains. Interface, at today's depressed valuation, is one of my favorite places to put new money into. Buy some shares, sell some naked put options or consider doing both. Those with the urge to go for the gusto and willing to assume higher risk could end up pleased by speculating on call buying.

Get in on the Ground Floor of This Stock as Market Builds Strength

I'm not a big fan of index investing -- I'd much prefer to seek out the very best bargains, which are primed to far outperform the averages. Here's one.

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