This Stock Is a Little-Known Gem

MSC Industrial Direct is an underfollowed gem. The company earns an A for financial strength and an 80th percentile ranking for stock price stability. Value Line says MSM's earnings predictability is even better, at the 85th percentile level. Despite its blue-chip status, since 2010, MSM has been more of a trading vehicle than a buy-and-hold play. Traders got four separate chances at 52% to 95% gains, plus dividends, over the most recent eight years. Those healthy profits each occurred within six to 25 months. MSM is expected to post all-time record earnings per share, or EPS, of $5.25 this year, up slightly from 2018's previous record of $5.10. All other major metrics have been growing, as well. Inexplicably, the stock price has failed to keep pace. While EPS grew by 121.5%, MSM's total shareholder return, due to a substantial recent pullback, was just 50.3% in exactly nine years. Discrepancies like that rarely persist. The cure typically involves a catch-up move in the share price, which arbitrages away the difference between true value and the depressed quote. What is MSM really worth? Since 2010, a typical price-to-earnings, or P/E, has run about 19.3-times, accompanied by around 1.87% in current yield. As of Sunday, MSM was offered for just 13.4-times this year's estimated EPS along with a generous 4.28% yield. That multiple is the lowest since 2008. Except for the past two months, shareholders have never received a higher dividend yield. A simple regression-to-the-mean valuation could easily support an end of 2020 target price north of $103. That goal is not far-fetched. MSM topped out at $105.70 in 2017, a year when final EPS were destined to hit $4.01, rather than $5.25. MSM's annual dividend rate was $1.80 in 2017 vs. the current $3. Don't simply take my word on this. Independent research from Morningstar calls the stock a 4-star, out of 5, buy. Morningstar does not issue year-ahead goal prices. It does, however, let us know its best estimate of present-day, fair value for each stock covered. With MSM, that number sits at $90, 28.4% above the stock's Sunday price. The firm's long-term prospects are even more compelling than its short-term outlook. Value Line expects EPS to reach about $7 within three to five years, taking the shares to between $130 and $175. Buying shares outright looks like the best way to go. Upside is substantial and you'll collect 4.28% in annual yield while you wait. Option savvy traders might want to consider selling some Mar. 20, 2020 expiration date puts as well. The $75 and $80 strikes offered fine premiums with the stock at $70.12. Worst-case, forced purchase prices dipped to either $66.10 or $67.30, respectively. Those premiums provided from 4% to 5.7% in an extra margin of safety vs. outright purchase. Maximum gains on these, or any other option sales, is always 100% of all money collected up front. That would be either $890 or $1,270 per 100-share commitment in my examples. No trade is ever risk-free. That said, owning MSM at the $66.10 net if exercised price on the $75 puts would have been a winning position about 98% of the time dating back more than three years. MSM has rarely been this undervalued. Reward now far outweighs risk. Buy some shares, sell some puts or consider doing both. The shares should be going ex-dividend for 75-cents per share within the next couple of weeks. Buying now will earn a full quarter's payment in short order.

This Stock Is a Little-Known Gem

MSC Industrial Direct has rarely been this undervalued, so reward now far outweighs risk.

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