What should you be watching as we break into the final month of the 2017? Well we have begun to see a transition in the market from the tech sector to the bank sector as the Trump tax plan rolls on. Obviously stocks such as Bank of America (BAC), Nvidia (NVDA), Amazon (AMZN), and Facebook (FB) will be under watch as they have made great gains this year (and BAC looks poised for more), but what I am going to point you towards is a bit different.
If you have been paying attention lately to the retail sector you will notice a lot of earnings beats lately and the sector has begun to push upward. I say this because the stock I have on watch for next week is Kohl's Corporation (KSS).
A little summary about the company first:
Kohl's Corporation operates department stores in the United States. It offers private label, exclusive, and national brand apparel, footwear, accessories, beauty, and home products to children, men, and women customers. The company also sells its products online through Website Kohls.com. As of January 28, 2017, it operated 1,154 department stores, 12 FILA outlets, and 3 Off-Aisle clearance centers. Kohl's Corporation was founded in 1962 and is headquartered in Menomonee Falls, Wisconsin. -- Taken from www.Finviz.com
I have decided to begin posting my D30 evaluation on each of my watchlist stocks so that you can see exactly what I am seeing in the company. Here is Kohl's:
As you can see I believe that Kohl's is still undervalued at its current level. I also believe that in the long term, 3 months to a year, you are looking to be relatively safe buying at the current price. That being said, looking at the daily chart below, you see that this may have a minor pullback coming as the buying has been increasing since the last earnings report.
Now digging in a bit to the stock let's take a look at the good, the bad, and the ugly.
At the current price Kohl's has a lower than historical price-to-book, price-to-sales, and price-to-earnings. This is something that is being seen all around the retail sector as AMZN has dominated the market and media in the past year. This has brought along a lot of fear on the future of the retail industry, and for right reason, but I also believe that it has brought opportunity as well.
The dividend yield currently stands at a nice 4.56%. This is well above the S&P 500 average and above my minimum of 3%. Add to this a payout ratio in the mid-50s and a growth streak of 6 years and it begins to paint a very nice picture of a solid dividend stock.
Another great thing about Kohl's is that they are committed to giving back to the investor not only in dividends but also in buybacks. Over the past 3 years they have a buyback ratio of 7.5, well above the average and actually is within the top 5% of the entire industry!
A final thing that I love about Kohl's is that they have increased their free cash flow and their Operating Cash Flow to Sales by keeping their stock smaller. More operating cash flow means that they will hopefully be able to make some changes to combat the online giants.
The debt. Long term debt has increased on a year-over-year (YoY) basis as has the current portion of that debt. The payroll has also increased and the interest rate, although, is lower but it still looks like a more expensive year for Kohl's.
To exacerbate the expense problem is the fact that EPS has fallen for Kohl's and may not return if AMZN and Wal-Mart (WMT) have anything to say about it. That being said, the guidance does point to slightly higher EPS next year but estimates can only do that, estimate.
The biggest worry for me when it comes to EPS is that it has been artificially produced by the huge buybacks. Over the past year the company has decreased the outstanding shares by almost 30 million and still the EPS has continued to fall.
Simply put: AMZN. The retail industry is at a crossroads right now that needs to be remedied. Kohl's has to deal with a lot of things that the online giant doesn't have to, like regional wage laws and rent increases, but overall the largest cost has come from trying to increase the e-commerce footprint. Kohl's margin has taken a hit as they try to ship for cheap and dig into the online sales. This is something to watch but currently isn't paying off as much as I would like it to be.
If you are a passive investor with some time on your hands and would like to pick up a nice dividend payout next week then I say go for Kohl's and get a company that is creating a lot of cash flow. The retail sector has been hit hard this year but Kohl's actually hasn't been performing too poorly. Does that mean that they have less to gain that say a Target (TGT)? Possibly. Does that mean that they have nothing to gain? Absolutely not.
While buying Kohl's right now at these levels may seem a bit of a foolish investment when you look at the daily chart, I believe that due to future sector rotation, the holiday sales, and the ability for Kohl's to generate cash flow, will allow them to continue the push upwards towards my price target of just under $60 dollars.
As always feel free to share any comments you have below!