Put the Analysts in Their 'Place'

I'll cover two separate topics here, both of which might help you become a better investor] in the future. Don't listen to analysts' calls, or at least question their advice Consider using earnings power as one of your valuation estimation tools. The Children's Place is one of my largest dollar holdings. I started buying it pre-Covid, then really went to town adding to it after the stock was pummeled by government-imposed store closures last winter. From a January, 2018 all-time high above $161, when the stock was much loved and very pricey, PLCE fell briefly below $10 on March 18. Wow! Intrepid souls who bought near ten bucks got the chance to unload on June 8 at close to $59 as re-opening mania peaked PLCE and a lot of other stocks at interim, near-term unsustainable highs. Many stocks fell back from their June 8 levels, but PLCE had especially poor performance from then, right through mid-August, as operating losses from the lockdown continued to weigh on its results. PLCE fell back to south of $18 after showing a large deficit in its end-of-July quarter. Of course those results sucked, expenses continued while most of the stores were still closed. Knowing that better times were just around the corner I really went to town buying more. During both mid-September and early October, PLCE bounced sharply to about $32-$33. Subsequent action was disappointing, though. PLCE declined again to under $25, providing one more chance for latecomers to establish positions. Did analysts alert clients to PLCE's great future prospects? Absolutely not. They hate to recommend stocks with bad momentum and horrible looking charts. On Oct. 26, Zacks research went as far as designating Children's Place as their Bear of the Day, with the shares just under $26. That advice could have been valuable at numerous times over the past three years. Instead, it was 180-degrees wrong at the time of their call. On Wednesday, PLCE was fetching over $39, about 50% more than it was when they screamed, Sell, Sell, Sell! PLCE never went much lower than when they warned people to get out, or at least avoid buying. Listening to Zacks' advice cost traders more than a 50% move over the next 22-days. Zacks was not the only culprit in the analyst community. Value Line's Oct. 23 issue published a new full-page report on PLCE. Its take was just as wrong. It labelled it a strong sell, while calling the debt-free company not too safe and noting its abysmal technical ranking. Few people reading that Value Line report would have thought about getting in, rather than getting out. The stock's action since mid-October has proven what I said earlier. Don't base your buy/sell decisions on analyst opinions. Instead, use fundamentals and a company's history to determine its true value. That's where proven earnings power can come into play. Children's Place earned from $3.60 to $7.91 per share in the five pre-Covid year running from fiscal 2015 through fiscal 2019 (Fiscal years end on the Saturday closest to Jan. 31st of the following year.) 5-year average EPS ran $5.81. A few positive factors should also be noted. Industry competitor Gymboree went bankrupt and PLCE ended up buying out its inventory and intellectual property. PLCE now owns and operates both their own and a Gymboree website to capitalize on both brand names. Pandemic-induced extra online buying saw PLCE's internet sales jump significantly, a trend that figures to continue. Management has been closing any unprofitable physical stores, as the leases come up for renewal. They are also negotiating more favorable leases on many properties they choose to keep open. Finances remain healthy and almost all stores are now open. Profits seem poised to rebound strongly starting with the next quarterly report due early next month. Once FY 2021 gets going year-over-year comparisons should become very exciting as they lap the horrendous losses incurred after last winter's shutdown. There's no reason PLCE can't get back to earning at least $5 per share within the next 12 to 18 months. That conservative assumption is still below the firm's historical actual earnings power. Applying a normalized P/E to that $5 EPS figure suggests an $83.50 target price. Achieving that modest goal would provide 113.5% upside from it Nov. 18, 2020 quote. That fine return does not include any resumption of dividends. Management was quite generous towards shareholders previously, though, and it's likely that quarterly payments will resume again before too long. Value Line assumes a return to over $2.00 per share annually during both 2021 and 2022. Children's Place was a solid growth company before the virus struck. It has taken steps to be even better as things normalize. Its high beta (1.45) means it won't take long for a big move once investors realize profitability has resumed. Management has continued shrinking the float. There were 24.7 million shares outstanding at the end of fiscal 2011. As of its most recent report that number was down to just 14.59 million, 40.93% fewer than nine years earlier. Less shares outstanding typically translates into higher EPS. EPS growth typically leads to multiple expansion. PLCE is ready to rumble. Buy now, before the crowd gets wise. There's no reason PLCE can't be back over $100 within a couple of years.

Put the Analysts in Their 'Place'

I have two investing lessons for you, using one stock, retailer The Children's Place, as my example.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 12/4/2020

On Nasdaq Diversity Initiative

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.