This Stock Is an End-of-the-Year Bargain

Non-recurring non-cash charges often make for confused investors. Uncertainly breeds doubt. When that happens in the final days of tax-selling, many traders will simply pull the plug, take their loss and move on. That appears to be the case with Lincoln National . September quarter headline ESP were a loss of $10.23. Back out a couple of one-time charges, though, and EPS were a positive $1.39 per share. On that adjusted basis LNC figures to earn about $7.19 in the year just wrapping up. That represent a drop of about 12.3% from 2021. Amazingly, though, LNC has dropped 60.5% from its 52-week high of $76.40. Long-term results have been decent, but not extraordinary. At the right price, though, even ordinary companies can become compelling stock purchase opportunities. Better still, almost every analyst sees LNC posting much better results in 2023 and beyond. Value Line looks for $8.15 per share, Yahoo Finance sees $9.03 and FastGraphs weighs in at $8.95 for LNC next year. This is not the first time LNC shares stumbled badly. From a low of $19 in 2012 the stock rallied to $62.10 in less than 3 years. A subsequent sell-off to $30.40 was just a prelude to a two-year run to $86.70. The momentary Covid-panic low was a ridiculous $16.10 in March of 2020. 20-months later LNC was back to $77.60, its 2021 peak. The recent plunge is likely to prove to be yet another great buying opportunity. At last week's close of $30.13 LNC now yields a well-covered 5.97% versus a more typical 2.01%. LNC sells for about 3.7-times Value Line's 2023 estimate, the lowest of the three research services mentioned. A normalized multiple for LNC is around 8.2-times. Even 8-times that estimate suggest LNC can rebound to at least $65 or so by this time next year. Getting back to a more typical price to book value could send LNC up to north of $72. Yahoo Finance keeps up its somewhat conservative year ahead outlook for most stocks with a 12-month target price for LNC of just $39.43. That seems way to low as it assumes LNC only reaches 3.4 times its own projection for $9.03 in EPS. Even so, hitting that extremely modest goal would deliver almost a 37% total return. Most of us could live with that if that's all that occurs. Research from Morningstar calls LNC undervalued by 50%. It sees present-day fair value as $60.29, almost exactly double its Dec. 23 closing quote. Based on that I wonder how Morningstar justifies just a 3-star, neutral rating on LNC. Go figure. Quantitatively based FastGraphs is more bullish on LNC than I or the other two services are. They see a typical price-to-earnings for LNC as 9.6-times, which supports a 12-month price goal of $85.92. Reaching that somewhat optimistic price would make for 185%, plus dividend gains. Option-savvy traders could even consider this very conservative buy/write combination . It offers excellent total return potential while also providing a nice dollop of downside protection. Here is the cash flow detail on a minimum sized, 100-share plus one covered call plus one naked put using the Jan. 19, 2024 expiration date $35 strike price. If held through expiration there are just two basic ways it could play out. LNC will either close at $35 or higher, or below $35. If the former situation occurs the following best-case scenario will be in force. Any upturn of 16.2% or more would translate into a cash-on-cash 95.2% total return. Over the 1.071-year holding period that annualizes at 88.8%. What if LNC somehow fails to reach and hold $35? If so, the worst-case scenario detailed next would apply. Barring a major collapse, though, even that does not appear scary. Combination writers would end up with double-sized positions but at an average cost basis of just $25.66 or so. Any decline of less than 15.5% would still allow for immediate liquidation for at least a small gain. Future stock market action can never be guaranteed. That said, owning LNC at the break-even price of $25.56 would have been a winning position for all but about six weeks during the previous 120 months. Lincoln National is severely underpriced. Buy some shares, collect the almost 6% yield and give it some time for the public to come to its senses once again. Set up a buy/write combination as well if you feel comfortable trading options. LNC goes ex-dividend for 45 cents per share on Jan. 9, 2023.

This Stock Is an End-of-the-Year Bargain

Here's why this name is undeservedly, and temporarily, cheap.

Columnist Conversation

Powell, 0DTE Options and How I View This Market Right Now

LIVE EVENT: Bruce Kamich and Todd Campbell Share Their Stock Market Insights

Sarge Guilfoyle Breaks Down the Jobs Report, Fed Policy and Stocks!

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.