If I Could Only Take One New Position, This Would Be It

I'm often asked what I would buy if I could take only one new position. As of Monday, that would have to be Alliance Data Systems . Among other things, ADS runs customer loyalty programs and private credit card services for other companies. ADS sold off one of its divisions this year for about $4.4 billion. It used $750 million of those proceeds to conduct a Dutch auction tender that retired almost 10% of its outstanding shares. The final price paid was set at $148.50, lower than the firm's maximum specified cap of $162. Only about 22.6% of all outstanding shares were tendered, meaning most holders felt the offer clearly undervalued ADS on a longer-term basis. I wholeheartedly agree with them. ADS has been a solid growth company. Since 2010, every major business metric showed significant improvement. Sales per share more than doubled. Cash flow was up more than 173%. Earnings almost tripled. Despite those great numbers ADS' current quote shows the stock reflects only a small part of that value creation. Situations like that are almost always rectified via a catch-up move in the shares which eliminates that disparity. From 2010 through 2018, ADS carried an average multiple of about 14.6-times. At its Monday closing quote of $108.04, ADS was offered for just 6.3-times this year's, and 5.2-times its 2020, consensus estimates. A return to a still sub-par 11.5-times price-to-earnings, or P/E, could send ADS back up to north of $240 by the end of next year. Achieving that modest goal would translate into a 123% gain. That's not far-fetched. Alliance topped out between $264 and $312 during each of the six years from 2013 through 2018. It changed hands as high as $183 in 2019 year to date. Cash dividends were initiated in 2016. They've been raised each year since. At its recent quote ADS yields a better than money market rate of 2.33%. Note that, by the time you're reading this, ADS will have gone ex-dividend for 63 cents per share. It might very well dip a bit after Wednesday's opening to reflect that news. I'm not alone in thinking ADS represents extraordinary value. Yahoo Finance shows it with a BUY recommendation and a clearly undervalued status. It notes its trailing 52-week high as $207.66 and shows an average 2020 earnings per share, or EPS, estimate for ADS of $20.89. Ditto for independent research firm Morningstar. It rates ADS as a 4-star, out of 5, buy, while noting its nice yield and ultra-cheap P/E. Morningstar deigns to provide year-ahead price targets. It does, however, show its present-day fair value estimate for each stock covered. For ADS, that number sits at $146, greater than 35% above its closing quote from Monday. Simply rebounding to that very achievable level over the coming 12-months would equate to 37.4% in total return. If my entire portfolio provides that result I'll be ecstatic. Long-term prospects for ADS appear even brighter. Value Line sees ADS' EPS rising to more than $33 within three to five years. That supports its view for a 2022 - 2024 target price range of $240 to $365. Alliance Data Services hasn't been this cheaply valued since the very dark days of early 2009. Buyers back then were well rewarded. ADS climbed from south of $23 to north of $78 within a year. By 2014 it hovered above $300. What caused the recent low of $99.20? Value Act Holdings partnership had purchased a major stake in ADS back in January 2017. It paid from $219 to $229, thinking ADS was worth much more. The partnership finally puked out their position on Oct. 29-30 of this year at between $101.50 and $102 per share. It didn't tender at $148.50 and couldn't take the pain of seeing ADS continue to decline. That loss can be our gain. Since Value Act sold, ADS has begun climbing again. Management was willing to pay up to $162 in its August tender offer. Buy some ADS shares, sell some long-term (LEAP) puts or consider doing both. Alliance Data Services offers a legitimate chance at doubling or tripling over the next few years.

If I Could Only Take One New Position, This Would Be It

Now at a bargain price, Alliance Data Systems is a great bet, and ready for a catch up.

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