If You See a Great Product for a Great Price, You'd Buy It, Right?

There is something to be said for buying shares in the highest quality companies when they are selling below fair value. Those kind of stocks rarely go to bargain-basement levels. They do, though, occasionally offer better than average entry points. Trucking firm J.B. Hunt is a perfect example right now. Its main business metrics could not be much more impressive. Nor are its past decade's growth record. Per share sales, cash flow and earnings all more than tripled. Book value soared by over 422%. Total shares outstanding shrunk by 10.16%. Continuous shareholders had nothing to complain about. Ten-year total return nicely paralleled the firm's solid progress. Over the most recent decade JBHT typically sold for about 23-times earnings, accompanied by around 0.93% in yield. As of Apr. 12, 2022 JBHT's forward multiple was slightly below average at about 19.6-times. That was down from over 25-times as recently as Mar. 16, when the stock fetched an all-time high of $218.18. Paying more than J.B. Hunt's typical valuation has not paid off well in the past. The three sojourns to extended popularity (red-starred below) all ended badly in the short run. Conversely, buying at (green-starred) lower than typical valuations always led to good near-term rallies. A simple regression to the mean valuation would send JBHT back up to about $199 by Dec. 31, 2022. Yahoo Finance's one-year target price of $209.71 appears slightly aggressive, however, it is lower than where JBHT changed hands just a few weeks ago. The crazy moment noted below comes from calling the shares overvalued at the same time that they say JBHT should rise by 23.9%. Quantitatively oriented FastGraphs comes in with a year-end 2022 goal price of $207.03 based on a return to a 23.3-times multiple on their projected EPS for 2022. Whichever source you believe is more accurate it appears that JBHT is destined to rebound from its newly carved out year-to-date low. That came as people fearing a recession during 2023 decided to bail out of virtually every transportation-related company- from rails and airlines to truckers and even FedEx and UPS . When whole industries get tarred with the same brush you can be confident that the poor stock charts are not related to company-specific news. Circumstances like that are what provide the chance to buy top-quality names at decent price points. Option writers can go one better via short sales of in-the-money LEAP puts. Using Jan. 2024 expirations allows for the mood to brighten as normal growth occurs making fundamentals even cheaper over time. Here are the actual prices for JBHT's Jan. 19, 2024 $170 and $180 strike price puts with the stock at $169.35. Worst-case break-even prices dropped to either $142.80 or $147.60 respectively depending on the strike price employed. Future stock market action can never be guaranteed. That said, owning JBHT at either of those if put prices would have been a winning position 100% of the time dating back more than a full year. Note, too, that as I've been writing this article JBHT has fallen further, to $167.57. That means put prices are juicier now, than what is illustrated above. J.B. Hunt is currently a premier company at a somewhat discounted valuation. That might appeal to conservative investors who see 15% to 25% annual gains as attractive enough on a very low-risk name. Put writers can capture nice returns simply by utilizing free buying power in margin accounts. They receive decent extra margins of safety as bonuses.

If You See a Great Product for a Great Price, You'd Buy It, Right?

Then why not apply the same logic to stocks. Trucking firm J.B. Hunt is a true 'left to right' growth, modestly undervalued name.

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