You Buy Stuff When It's on Sale; Do the Same With Stocks

I woke up Monday morning to see the futures indicating a much lower opening. Just before 7 a.m., the Dow was expected to drop more than 600-points. Why were things so bad? A major Chinese real estate company was teetering on the verge of bankruptcy. Did you own shares or debt in that one? Almost certainly not. Almost nobody outside of China was allowed to. Why then, should world markets sell off so sharply? There are many people who benefit from panic selling by individuals. They simply love scooping up great stocks at incredible prices. By early afternoon the Dow Jones was off by about 800-points and the following headline started popping up all over the place. When most people hear it's the worst day since October of 2020 they feel obligated to sell to avoid any further pain. Instead, they should be asking the obvious question, Was last October, when the other big selloff took place, a good time to have sold? The chart below says all you need to know about that. Traders who sold the plunge almost instantly regretted their decision. Those who bought in, or added to positions, saw the Dow surge almost non-stop from late October through the second week of May. As of Sep. 20, 2021 the Dow Jones Industrials were right back to where they sat around mid-April. That was hardly a disaster. Many smaller-cap stocks, though, had already given back 20% to 50% from their springtime peaks. That made for some tremendous bargains for those who could discern the true values as much higher. Here is an example of that type of stock. Nobody knows the real value of their company's shares better than the people running the company. Upper management at footwear company Designer Brands started buying in large quantities last March, with DBI hovering around $14. On Sep. 15, 2021, with DBI then down to $12.62, executive chairman Jay Schottenstein couldn't resist picking up some more. He plunked down an additional $2.254 million or so for another 178,594 shares. Since Mar. 24, 2021 there were five distinct insider purchases totaling greater than $18.7 million. The average purchase price ran about $13.83 per share. As of this week we can all buy DBI even cheaper than they did. Should we be doing that? Here are the facts. You make the call. Around midday, while the broad markets were selling off, DBI was up a bit. It briefly spiked up to $13.39 before settling back to about $13. As of 2:41 p.m., DBI had not yet sold for even a penny below where it finished on Sept. 17. Designer Brands changed hands as high as $20.48 as recently as May 17. Back in 2013 and 2014 it often fetched well above $40. Yahoo Finance's 12-month goal price of $19 looks quite conservative, as it is below where the shares traded just four months ago. Even so, simply bouncing back to that number would deliver almost 50% upside from here. What does Yahoo Finance think EPS will be in fiscal 2021 (ends Jan. 29, 2022) and fiscal 2022? Its current estimates run $1.12 and $1.36 respectively. I'm thinking those projections will turn out to be too low. Why is that? Take a look at how understated analyst opinions were in fiscal first quarter and second vs. actual results. DBI posted EPS running from $1.46 to $1.88 during each of the nine, pre-COVID, years stretching from 2011 through 2019. There's no reason to believe they can't match or exceed those levels again soon. Thirteen months ago, in the throes of COVID-induced horribleness, Value Line thought DBI could earning $1.10 this year. That was before the much better than expected results starting appearing for both DBI, in particular, and the footwear industry in general. Value Line was unwilling to go out on a limb and recommend DBI at $7 or so back then, even at just 6.4-times their own forward estimate. Not me, though. I was a big buyer between $3 and $7 and have pocketed some huge gains on the shares, expired puts and covered call income. What will Designer Brands sell for when EPS get back to at least the $1.50 level? Applying a typical 16.2 multiple to those EPS supports a target price of about $24.30. From its Sep. 20, 2021 quote that would represent a cool 87.2% rise. Based on the data above my mid-$24s goal is far from an upper limit. DBI commanded more than 20-times earnings during 2013 through 2015 and again during 2018 and 2019. It doesn't seem a stretch to think it can rise to $30 - $40 again within a year or two. It's no wonder, then, that company insiders have been accumulating multi-million dollar stakes while the shares remain cheap. DBI's option premiums reflect its volatile nature (beta = 1.7-times) and potential for big moves in either direction. Owners of DBI shares can pocket 10% of the current stock price simply selling some 8-month, $17.50 strike price covered call, options at $1.30. That's a fine return on a strike price, which allows for 34.6% upside just to reach the call price. Similarly, put writers can capture $2.35 per share, or 18% of the current quote, just for standing ready to own DBI at a net cost of $10.15 ($12.50 strike price less the $2.35 put premium). Today's takeaways? Don't be afraid to buy during sharp market selloffs. More often than not, they represent great buying opportunities. Ignore macro factors and buy what looks to be significantly. Undervalued. Keep an eye out for heavy insider buying. Corporate executives know best what a company is worth.

You Buy Stuff When It's on Sale; Do the Same With Stocks

Here's why you shouldn't get skunked by media headlines, using Designer Brands as an example.

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