If You're Tired of Taking a Haircut on Losing Stocks, Get Mohawk

Mohawk Industries is No. 1 in the world at providing flooring products and services. Estimated 2022 revenues are about $120 billion. The firm posted outstanding growth over the most recent decade, including and despite severe disruptions caused by the Covid-crisis of 2020. If 2022's estimates prove accurate, earnings per share will have more than quadrupled. You'd think that a company like that would command a somewhat premium valuation. Instead, due to the currently depressed overall market, MHK was offered on Wednesday morning at one of its cheapest valuations to date. That is even more surprising when you realize that 2021 was a record setter and 2022 and beyond appear poised to build on that. Shares that fetched north of $212 during five of the past seven years on lower fundamentals could be bought for south of $119 on June 22. What is Mohawk really worth? Its long-term average price-to-earnings runs about 16-times. It topped out at multiples of 20.8-times and 21.1-times during 2015 and 2017, respectively. Simply bouncing back to a 15 price-to-earnings would justify a winter of 2023 target price of about $232, implying an eight-month upside potential of almost 95%. Based on previous peaks that goal is far from an upper limit. Yahoo Finance sees MHK recovering to $171 by this time next June. I'm calling that out as overly conservative. It implies that Mohawk will just command a 10.2 multiple on its own year ahead earnings estimate for 2023, way below MHK's own historically average level. Independent research from Morningstar labels MHK with its highest, 5-star, Buy rating. In fact, anything below $145.64 qualifies the shares for that honor. Morningstar deigns to provide year-ahead goal prices but does let us know what each stock it covers appears to be worth right now. For MHK that number is $186.76, about 57% higher than today's quote. FastGraphs is more bullish on MHK than both Yahoo Finance and Morningstar. It calls Mohawk's normalized P/E as 16.58-times. The graphic below only shows their year-end target prices for 2022 and 2023 using a 15-times P/E. Even so, it sees MHK worth $232.18 by Dec. 31, 2022 and at $257.20 by the end of 2023. Extend your time horizon on MHK to 2025 - 2027 and things look even better. Value Line feels that Mohawk should be at least $290 by then and possibly as high as $430. The huge potential gains shown were calculated with MHK at $141.66 just a few weeks ago. Implied gains are much larger now from a substantially lower starting price. Owning shares outright provides excellent prospects with no upper limit and no preset time horizon. Option sellers with 18-month time horizons could set up the following Dec. 15, 2023 expiration date $140 strike price buy/write combination. Buy/write combos involve purchase of at least 100-shares while shorting a covered call and a naked put on the same stock. The example shown uses identical $140 strike prices and expiration dates. These were actual bid-ask spreads on MHK's longest LEAP options on Wednesday at 9:47 a.m. Here are the cash flow details on the minimum sized buy/write combination at $140. If these are held through expiration day there are just two possible outcomes. MHK will either close that day at $140 or higher, or below $140. If the first case plays out the following things will take place, delivering the best-case scenario. If executed in a margin account with excess buying power the cash-on-cash return will be almost 111%. That's every bit as good as simply buying MHK at $119.69 and seeing it rise to around $252. Buy/write combinations, though, offer something that outright purchase can't. They provide a margin of safety in case things don't end up as good as expected. The following worst-case scenario will unfold if MHK fails to reach and hold $140 on Dec. 15, 2023. If this occurs you'd end up with a double-sized position in high-quality Mohawk, but an average net cost of just $103.91 per share. Any loss of up to 13.7% from the trade inception price would still not incur any loss for those employing the buy/write strategy. Future stock market action can never be guaranteed. That said, owning Mohawk shares at under $104 would have been a winning position 100% of the time dating back to before the start of December 2020. Note, too, that MHK's EPS rose briskly during that time span, from Covid-depressed EPS of $8.83 in 2020 to $14.83 during 2021. Also note that MHK's share price spent most of that 18-month stretch tending between $150 and $200, well above the $140 final price needed to achieve the best-case scenario. Buy some MHK shares, sell some naked puts on Mohawk or consider going with buy/write combinations. Reward appears to far outweigh risk.

If You're Tired of Taking a Haircut on Losing Stocks, Get Mohawk

Now you can own a world leader industrial company at a ground-floor entry price.

Columnist Conversation

This Could Get Messy

Latest AAP Podcast With Helene Meisler!

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.