Once a month I do a conference call for the Actionalertsplus.com club and my most recent theme centered on the idea about how wrong the market can be about how stocks are valued. It's a controversial thesis: Stocks are supposed to represent the value of future earnings power and how much you should pay for them. The conventional texts say that because everyone has the same information about a company, the market's judgment -- the sum of all knowledge -- is perfect.
But almost every day we see imperfections that can make you fortunes if you just lose the idea, or I should say, the nonsense, about the perfect information thesis.
In the morning Conagra Brands (CAG) reported. Right about now one year ago Conagra missed the quarter big time. The judgment at the time? Conagra had bought Pinnacle Foods for $10.7 billion back in June of 2018 and judging by how poorly some of the Pinnacle Brands performed, Conagra had gotten had. It had bought a bunch of has-been brands like Wish-Bone salad dressing, Duncan Hines, Hungry Man, Aunt Jemima, Lender's, Mrs. Paul's and most importantly Birds Eye vegetables.
At the time the Conagra people were steadfast about the acquisition saying that it built out their frozen food presence. It made them the number two in the froze aisle which was incredibly important because millennials crave frozen food because it's cheap and can be heated up at the drop of a hat. The issue was that Conagra management simply hadn't had a chance yet to reinvent the brands using the "Conagra Way."
I spent a lot of time with CEO Sean Connolly and his team and I came around to the fact that the market had way too little faith in these guys and it was just plain wrong to put them in such a penalty box.
The company Thursday reported a quarter and it was magnificent, now that the Conagra Way has had a chance to work its magic. That's why the stock had rallied an astounding $5 or 17%. I expect to hear much more about this triumph over the skeptics when the company attends the Consumer Analyst Group of NewYork or CARGNY conference in mid-February and it would not shock me if the stock weren't substantially higher by then, given how off the market was in its calculations.
You want to know another totally mistaken valuation? The valuation of Rite Aid (RAD) . Last night I took a caller on Rite Aid and actually made fun of the company, saying it simply could not be bought. I had thought it was getting its clock cleaned by Amazon (AMZN) , Walgreens (WBA) and CVS (CVS) . I could not have been more wrong. It delivered better-than-expected numbers and the stock went wild jumping 42%.
You see the conventional wisdom, which I certainly represented, was so sick of the management changes, the competition, the balance sheet, you name it. What I didn't count on besides them actually eking out a better number was that there are a huge number of shares sold short in the stock, about a quarter of all the stock that's traded. So when it didn't blow up you got a short squeeze of humongous proportion, propelling the stock far more than it would normally go.
Misvalued to the max.
One more to consider, a company with a stock that is just starting to be valued correctly: ViacomCBS (VIAC) . In my last club conference call I talked about how the merged company is entirely misunderstood and the notion that it should sell for six to seven times earnings is insane. Now it's moved up to eight times earnings, but in an era where content is king and so many companies need something to stream, what could be better than having Paramount, CBS and the CBS library of reams and reams of shows.
Why is it misvalued? I think that people are too worried about Facebook (FB) or Alphabet (GOOGL) or Amazon (AMZN) buying the rights to the sporting events that CBS treasures, especially the NFL. But CEO Bob Bakish made it clear on "Mad Money" that the NFL actually cares tremendously about how games are televised and it regards CBS' coverage as something that can't be replicated.
I don't see it getting a market multiple, but this discount, which makes one of the cheapest stocks in the entire S&P 500 is unwarranted.
Misvaluations exist. And they make you money. The easy money's been made in Rite Aid. The harder money's being made in Conagra. And you are just starting to make it in ViacomCBS. So why not go along with the club for a ride?