The Market's Just Toying Around With This Stock

Mispriced securities, stocks selling for way above, or way below their true values, should be treated as gifts. They give traders the chance to sell high and buy low. Based on facts, specialty retailer The Children's Place appears to qualify as grossly undervalued at present. Prior to Covid-19, things were going quite well. All Major metrics had grown nicely since 2011 and fiscal 2020 (ends Jan. 30, 2021) looked to be on track for excellent progress. Its near term outlook took a big hit when stores were ordered closed due to the pandemic. By mid-June, though, 95% of locations had been reopened. PLCE is likely to post modest profits this year as second half numbers offset the company's dreadful first half. As of July 27, Value Line sees $1.10 for PLCE's full year, while Yahoo Finance looks for positive earnings per share of $0.59. Both expect large rebounds in fiscal 2021. The multi-year growth table tells the story. PLCE is a proven winner with improved economy of scale after acquiring Gymboree, its largest competitor, out of bankruptcy. It purchased Gymboree's trademarks, website and remaining inventory at favorable prices and no longer has to compete with them. PLCE traded as high as $161.60 at its 2018 pinnacle. It was north of $71 this past January. It fetched $53.41 as recently as June 8. As of Monday the shares were offered below $27. Ignore this year as an outlier and focus instead on years to come. Based on Value Line's $4.45 estimate for fiscal 2021, PLCE is now selling for a 6-times price-to-earnings. Use Yahoo Finance's slightly lower estimate and its forward multiple still weighs in at just 6.9-times. From 2012 through 2019, PLCE typically commanded around 16.7-times earnings. Even a partial reversion-to-the-mean valuation could send the shares back above $71 by Jan. 31, 2022. That target price is not only reachable, it is probably too conservative. Note that PLCE fetched more than double that goal during every calendar year dating all the way back to 2010. It could be sold for over $111 during each of the four years 2016 through 2019. Those who disagree with my assessment should still consider buying while the shares are unusually cheap. Yahoo Finance's year-ahead target suggests almost 63% upside from here. Independent research provider Morningstar deigns to provide 12-month target prices. It does, though, let us know its assessment of present-day fair value for each stock covered. For PLCE that figure stands at $46.22, greater than 73% above its current quote. Still not convinced that PLCE is quite cheap enough? Consider shorting some LEAP puts out to the Jan. 21, 2022 expiration date. Premiums on very conservative strike prices (from $25 to $40) are huge right now. Actual option prices, with PLCE at $26.70, are shown below. Worst-case, forced purchase prices dipped to between $15.40 and $20. They provided from 25.1% to 42.3% margins of safety vs. the trade inception price. Maximum gains on these, or any other option sales, always equal 100% of all premium collected up front. Those would be either $1,540, $1,750, $1,880 or $2,000, respectively, per 100-share commitment depending on the strike prices employed. Owning PLCE at any of the if exercised net costs would have been a wining position greater than 99% of the time dating back a full decade. Take advantage of Mr. Market's mistaken valuation on The Children's Place. Buy some shares, sell some puts or consider doing both. I added to my long share positions on Monday.

The Market's Just Toying Around With This Stock

It's got The Children's Place all wrong -- and here's where I bet it can go.

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