Last Wednesday, many on Wall Street were surprised -- including myself on Treena Street in San Diego -- by the nonaction of the Federal Reserve after months of tapering talk.
The Federal Reserve has been warning it would happen, probably in September. Well, it didn’t happen, and stocks rallied and interest rates fell. Why, you may wonder.
If interest rates stay lower longer, then consumers should be able to keep buying cars and homes, which should help stimulate the economy. So while Wall Street was expecting a stimulus cut, the lack of any cut was enough to excite the market.
You may be asking why the Federal Reserve didn’t cut some of the stimulus – yes, we heard that the economic data was weak, but it’s not that weak. After all, we have had falling jobless claims for many weeks. Last week, we saw a very strong number from the Philly Fed and heard about the big jump in new and backlog orders.
I think the reason the Fed held off was concerns that come September, the government could be shut down over budget issues and that the two sides wouldn’t be able to come together.
Also, come Oct. 15, we will be hitting the debt ceiling, which must be raised for the United States to continue to operate. Unfortunately, both sides are very far apart from making a deal, and a compromise looks doubtful. I think what the Fed was also thinking was if this happens and we just began cutting back on the stimulus, that decision would look pretty foolish and the economy could take a big hit for the entire fourth quarter. So rather than risk it, they decided to wait until October before taking any action.
While I think there could be a pullback in the markets based on the rocky road the government is going to put us through, an investor should always be looking for companies that could be great investments and that would provide some good returns 12 to 24 months down the road.
One of those potential companies would include Kohl’s Corp. (NYSE: KSS). It is a department store retailer founded in 1962 and currently has 1,155 stores in 49 states.
The stock currently trades at about $52 per share and has a 52-week high/low of $55.25/$41.35. The company has a current PE of 12.4 thanks in part to the aggressive stock buyback of nearly 25 percent of the outstanding stock over the last four years. Price to sales looks OK at 0.59, compared with the industry 0.41. Price to book value looks very good for the company at 1.90 versus the industry average of 4.3. Lastly, Kohl’s generates a ton of cash, which it has used to do all those stock buybacks, and the price to cash flow is very attractive at 6.3, compared to the industry at 16.5.
In addition to the stock buybacks, the company has done a decent job of paying shareholders a good return on the dividend, which is currently 2.7 percent. The company uses only 31 percent of its earnings to pay that dividend; increases in the dividend could be in the near future.
This has not been the best 12 months for retailers, which as an industry did see its sales drop by 5.9 percent year over year. Yet Kohl’s experienced a 2.5 percent increase in sales. It also managed to squeak out a 1.0 percent increase in earnings per share year over year, while the industry experienced a 37 percent drop.
The balance sheet for Kohl’s, while it could be better, does outshine the industry average. Current ratio for Kohl’s is 1.8, which towers over the industry average of 1.4. Debt to equity also looks better at the company, checking in at 75.8 versus the industry at 100.8.
I’m pretty excited when I look at Kohl’s and see that it has a net profit margin of 5.0 percent when the industry average is a negative 0.2 percent. My requirement for return on equity for a company is 15 percent, and while that is not always easy to find and the industry is a negative 0.90 percent, Kohl’s has an ROE of 15.9 percent.
Kohl’s seems to be one of those lost retailers that no one likes, which reminds me of Walmart (NYSE: WMT) a few years ago when it had all these great fundamentals and traded about $40 per share and everyone hated it. Today, Walmart trades about the mid-$70s and has provided investors with a good return over the past few years. Looking out to January 2015, the mean estimate of the earnings for Kohl’s is $4.67 per share, with a current price about $52. That means that this shareholder-friendly company trades about 11.1 times forward earnings. With a forward PE of 16.5, the target sell price would be $77 per share -- roughly a 48 percent gain not including the dividends.
If that type of potential gain is one that you would be happy with, maybe it’s time you looked to see if Kohl’s would make sense in your portfolio.
Have a question or a company you'd like me to take a look at? Email me at firstname.lastname@example.org.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.