Looking for an Undervalued Stock in a Solid Company? Give Whirlpool a Spin

Most stock traders worship at the Altar of Perpetual Growth. Alternatively, they may adhere to the doctrines of the Church of What's Working Now. Those techniques are suitable for very short-term trading, but carry a lot of risk. Almost every stock that qualifies has already made a large run, making it ripe for a pullback. Investors with somewhat longer-time horizons might find better results from seeking out clearly undervalued shares with solid fundamentals, even if growth and momentum are temporarily absent. Appliance manufacturer Whirlpool provides a fine example of how that type of stock was eminently playable on three separate occasions dating back to 2011. Whirlpool has a decent long-term record, but remains a cyclical performer. Earnings per share goes up, and down, along with economic swings. Its shares tend to overreact to both good and bad periods. That creates nice trading opportunities for contrarians. Before knowing what to do, you always need to establish what a normalized price should be for the stock in question. Since 2010, WHR's typical price-to-earnings has run about 11.4-times, accompanied by around 2.32% in current yield. All three of its should have sold moments (red-starred below) reflected higher-than-typical valuations and lower-than-average yields. Those were obvious sells for anyone who took the trouble to determine normal for WHR. All four of Whirlpool's best buying opportunities (green-starred) occurred when the stock sold for bargain-basement P/Es. Each instance also gave shareholders well above average dividend yields. That was especially noteworthy in 2011 and 2012, years when EPS dropped consecutively. Growth and momentum worshippers sold in disgust on the worsening fundamentals. That drove WHR's valuation to such big discounts that it almost had to go up despite the bad news. From 2011's nadir to Whirlpool's early 2015 top, WHR rose by 380% plus dividends. WHR's early 2016 bottom was more the result of an overall market sell-off. It dipped to just 8.8-times forward estimates, while yielding a better-than-normal 3.16%. That was less of a valuation discount than the 2011-12 period. Consequently, the rebound over the following 16-months only weighed in at 64% plus dividends. Christmas Eve's capitulation low was more similar to the what we saw in 2011 to 2012. WHR's forward multiple dropped to 6.6-times, while its yield hit the highest level since the dark days of 2009. Unsurprisingly, and despite an expected slight drop in the current year's earnings, WHR was up more than 45% from that low point as of July 7. That very nice rebound came about in spite of tariff-related headwinds. From $144.66, Whirlpool is still slightly under-priced. I'm using a conservative 11 multiple on this year's $15 earnings per share estimate to create an end of 2019 goal of $165. That same price-to-earnings could support a Dec. 31 2020 target of about $176 if the consensus view for next year plays out. I usually think Morningstar's stock assessments are pretty good. In WHR's case their present-day fair value estimate of $151.18 seems a bit conservative. If you own WHR but would like to hold on for a bigger gain, consider selling some Jan. 17, 2020 expiration-date covered calls at $160 to $170 strike prices. You'll pocket decent premium income right away, immediately removing $3.28 to $5.60 per share of downside risk. You'll still maintain additional upside potential ranging from 14.5% to 19.7% from the trade inception price. Barring a positive earnings surprise, at the if exercised price points, WHR would not look undervalued anymore. Another side benefit? In taxable accounts you'd defer taxes on sales made in January until April of 2021. Investors who bought late in 2018 would get the additional benefit of qualifying for long-term capitals gains treatment if called away in January of 2020. How cool is that? Change your focus from nothing but growth and you'll open yourself up to a much larger range of investment possibilities. Whirlpool just served as a good example of a whole category of cheap stocks that most traders never even consider.

Looking for an Undervalued Stock in a Solid Company? Give Whirlpool a Spin

Whirlpool has a decent long-term record, but remains a cyclical performer with nice trading opportunities for contrarian investors with longer-time horizons.

Columnist Conversation

Exiting Some Nice Gainers -- JPM, CERN

Cutting the Puts

More of that "Non-Existent" Inflation for New Yorkers

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.