Electric car maker Tesla, Inc continues to see its stock (NASDAQ: TSLA) fall this week following an analyst’s decision to lower the price target for Tesla shares. Not only is the stock down 18% so far in just this month alone, but it’s fallen by about 42% year to date. More analysts are warning about TSLA’s downside risk. “Tesla’s stock is damaged,” explains Oppenheimer Chief Technical Analyst Ari Wald. He thinks there could be downside risk to Tesla’s stock to $180, or 8% below the current market price.
On Wednesday, Citigroup analyst Itay Michaeli lowered his 12 month price target for the auto maker’s stock price from $238 to $191. “The risk/reward still appears negatively skewed despite the recent capital raise and stock pullback, mainly on lingering demand/free cash flow concerns,” said Michaeli (via Barron’s).” And Michaeli isn’t alone. Also making headlines on Wednesday was Bank of America analyst John Murphy, who also reiterated his own Sell rating on the stock. The following day Tesla shares lost as much as 6% in the morning before bouncing back up by the end of the trading day.
Additionally Tesla’s dependence on China for future sales growth could be thwarted by the ongoing trade war between China and the U.S. Despite lower Model 3 deliveries, the management team at Tesla has maintained an optimistic tone about the rest of 2019. Tesla says it expects to operate in a cash flow positive manner during the current quarter and in the second half of the year while growing its deliveries 45% to 65% year over year. But many analysts are dubious about those claims and thinks the automaker is overly optimistic.
Some of the more optimistic analysts covering TSLA have altered their opinions recently. For example, “Wedbush analyst Daniel Ives reiterated a neutral rating for Tesla stock over the weekend. But he also lowered his 12-month price target for the stock from $275 to $230. This is down significantly from the $440 price target and outperform rating he had for the stock last December. The analyst is unimpressed by Tesla’s recent efforts to build hype for its autonomous taxi service plans and other projects beyond the Model 3, worrying they are taking energy away from the company’s most important priorities. Ives explained, “With a code red situation at Tesla, Musk & Co. are expanding into insurance, robotaxis, and other sci-fi projects/endeavors when the company instead should be laser focused on shoring up core demand for Model 3 and simplifying its business model and expense structure in our opinion with headwinds abound.”
To make matters worse for Tesla, Consumer Reports warned this week that a recent update to Tesla’s Autopilot driver assistance software does not work well and could be unsafe for users who use the program. “It doesn’t appear to react to brake lights or turn signals, it can’t anticipate what other drivers will do, and as a result, you constantly have to be one step ahead of it,” Jake Fisher, Consumer Reports’ senior director of auto testing, said in a news release.
The stock may continue its medium term decline and meltdown like a defective electric car battery. It took a long time just for the company to break even, and nobody knows whether or not Tesla can make a consistent profit in the long run. It may be a very interesting company, but that doesn’t necessarily mean it’s a good long term investment. If you already hold this stock it may be a good idea to put a stop loss on your position. TSLA has already fallen below its 200 day average, and the next major support level is around $150.
This author does not have any shares in TSLA and does not plan to own any within 72 hours of this post.
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The Dow Jones Industrial Index is one of the best-known indexes in the world, yet many investors have not taken closer looks at all of its constituents. We believe that several of the thirty Dow Jones stocks are attractive right here, including Goldman Sachs (GS).
As a leading investment bank Goldman Sachs is impacted by troubles in international trade and global equity markets. On top of that the company came under pressure due to the 1MDB scandal in Indonesia. Despite these headwinds, Goldman Sachs looks like a strong long-term investment at current prices, as the stock has a good chance of delivering mid-teen total returns over the coming five years.
Goldman Sachs is one of the leading financial corporations in the world, combining services such as investment banking and investment management, and operating globally, with diverse customers. Goldman Sachs operates in four segments: Investment Banking, Institutional Client Services, Investing & Lending, and Investment Management.
It is not a primary competitor of money center banks such as Wells Fargo or Bank of America, instead being more weighted toward investment banking and related businesses, where it competes with Morgan Stanley. Goldman Sachs was founded in 1869, thus its history dates back 150 years. The company is headquartered in New York, NY, and is currently trading with a valuation of $71 billion.
Recent Earnings Results And Growth Outlook
Goldman Sachs has announced its first quarter earnings results in April, which were considerably better than the results that the analyst community had expected.
Goldman Sachs managed to generated revenues of $8.8 billion during the quarter, which was 13% less than the revenues that Goldman Sachs has generated during the previous year’s quarter. An even larger decline was expected, though. Goldman Sachs remained the market leader in terms of completed mergers and acquisitions, and Goldman Sachs also held the leadership position in equity offerings. Goldman Sachs’ Institutional Client Group generated lower revenues compared to the previous year’s quarter, but that was not a surprise, as the first quarter of 2018 had been a quite active one, which led to a harsh comparison.
Source: Goldman Sachs presentation
Goldman Sachs generated earnings-per-share of $5.71 during the first quarter, on the back of solid net profits Goldman Sachs achieved a return on equity of more than 11%, while also growing its book value to $209, which is more than Goldman Sachs’ current share price.
Over the last year Goldman Sachs’ stock performed relatively weak, which can be attributed to the macro factor of worries about the global economy, as well as to the scandal around 1MDB that is specific to Goldman Sachs. In the 1Malaysia Development Berhad scandal, then-Prime Minister Najib Razak was accused of embezzling $700 million with the help of Goldman Sachs. Goldman Sachs plans to discuss with the DoJ how to resolve its role in the corruption scandal in the near future, it could be required to plead guilty, while penalties are likely as well. This scandal will not break Goldman Sachs as a company, though, and it is likely that Goldman Sachs will recover from the fallout of this issue in the not-too-distant future.
In the meantime, Goldman Sachs was part of the group of banks that managed Uber’s huge IPO in May, which should be reflected in Goldman Sachs’ Q2 results. Goldman Sachs also acquired United Capital Financial in a $750 million deal in May, thereby boosting its wealth management business further.
Goldman Sachs will, we believe, be able to achieve a compelling earnings-per-share growth rate of 8% over the coming five years, driven by lenient regulation, which should lead to business growth and which leads to reduced compliance and legal expenses. On top of that, Goldman Sachs’ moves to expand its loans and savings business via its Marcus platform should drive revenues as well. Goldman Sachs has also reduced its share count by more than 20% over the last decade, and future share repurchases should allow the company to reduce its share count further, which will have a positive impact on its earnings-per-share growth rate.
Valuation, Dividend, And Total Return Outlook
Goldman Sachs’ shares have recently fallen below $200 again, and based on our forecast for this year’s earnings of $23.50 on a per-share basis, Goldman Sachs is valued at just 8.2 times 2019’s net profits right now. This is a quite low valuation in absolute terms, and it also represents an inexpensive valuation relative to how Goldman Sachs’ shares were valued in the past. We see upside potential towards a fair price to earnings multiple of 10.5, which would be more in line with Goldman Sachs’ historic valuation.
Assuming that the 10.5 times price to earnings multiple is reached in 5 years, multiple expansion could add about 5% to Goldman Sachs’ annual returns during that time frame. When we factor in Goldman Sachs’ forecasted earnings-per-share growth rate of 8% and its dividend, which currently yields 1.8%, we get to a forecasted annual total return of 14.8% over the coming five years, which we deem highly attractive.
Goldman Sachs has a leadership position in the markets that it serves, while also expanding non-core businesses such as its Marcus lending platform. Acquisitions, such as the takeover of United Capital Financial, boost Goldman Sachs’ growth outlook further. Due to paying out just a small amount of its net earnings in the form of dividends, Goldman Sachs has ample means to reduce its share count via stock buybacks. These are especially accretive when the stock trades at an inexpensive valuation, such as right now.
We believe that Goldman Sachs will be able to grow its earnings-per-share at an attractive pace over the coming years, while its dividend and multiple expansion potential result in further tailwinds for Goldman Sachs’ total returns over the coming years.
Downside risk for the stock seems low, as Goldman Sachs’ shares are very inexpensive already, and at the same time, the forecasted mid-teens total returns make Goldman Sachs a buy below $200.
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The price-to-earnings (P/E) ratio is considered an essential valuation indicator and has been historically associated with “value investing.” Simply put, the PE ratio defines how much an investor is willing to pay for each dollar of net earnings.
Formula: PE Ratio
P/E Ratio of a Stock = Current Market Price of the stock/Earnings per share
For example, if the company’s stock price is $200, and has an earning per share of $10, the PE ratio of the company then would be 20 ($200 divided by $10). This is the simplest way to assess PE ratio.
Let’s dive a bit deeper into what PE ratio means and how we can use it in our investments.
Variations of PE Ratio
There are two PE variations. The first is the trailing PE ratio, which you calculate by using the earnings of the previous year. Because the trailing PE ratio is more objective, it is one of the of the most popular benchmark ratios out there.
The other PE variation is the forward PE ratio. It is calculated by using the estimated earnings for the upcoming year. This forward-looking ratio is effective for predictions and valuation estimations.
There are also some other variations like PEG and CAPE, but the forward and trailing ones are quite popular. The easiest way to remember the difference is the trailing PE looks at the past while the forward PE looks at the future.
How to Use the PE Ratio
One way of using the PE ratio is when the investor compares the PE ratio of one company with similar organizations within the same sector, as well as the average PE ratio of the industry. It will help give the investor a glimpse of the stock’s performance and if it’s is trading at a premium or discount to its peers.
The investor can also compare the current PE ratio of the company with the past PE Ratio trend of the same company. Using this method helps to see the historical financial performance of the company, and if the stock is trading at a premium or discount. For instance, if the company is trading at a current PE of 12, but the average PE for the last 20 quarters was 15, the investor needs to study the difference and see if it’s worth buying into the stock.
What is High and Low PE Ratio?
It’s best to evaluate the PE ratio in conjunction with other financial indicators. Otherwise the above or below average PE ratio does not necessarily indicate anything meaningful. A high PE ratio may suggest that investors are optimistic about the future earning potential of a company. However, it could also mean that the company is priced merely higher than similar organizations, and will likely revert to the average PE of the sector.
On the other hand, a low PE ratio could speak to the stock being undervalued. Without considering the reasons for the low PE though, a so-called “safe” stock can be a value trap for investors.
PE and Understanding Context
Growth vs. Value: You should note that a stock cannot be valued on the same parameters as a value stock. A fintech lender which is growing at over 20% per year in revenue cannot be assessed on the same PE scale of a traditional bank. A growth stock would naturally tend to have higher PE due to the expectation of growth in profits in the long term.
Industry: There are two things to remember when looking at a company within a set industry. The first is that you must compare companies within the same industry. The second, the companies must also be similar in size. Both of these are crucial for making a conclusive decision. Since each industry has different financial and profitability metrics, not using these parameters could lead to inconclusive results. For example, comparing PE of a B2B software company with $100 million in sales with Microsoft’s PE will give inconclusive results even though they are in the same industry.
There’s a research paper by Kansas City Fed that sheds light on how you can use PE to time the market. The average PE on analysis of over a hundred years’ worth of data was around 14.5%.
The number in and of itself gives minimal perspective to an investor though. However, the next chart helps us understand the performance of stocks at different PE Ratios. In the diagram, “each observation is marked by a number, which stands for the year the P/E ratio was calculated.”
As you can see, we mostly witness subpar (below 5%) or negative returns when the PE ratio tends to be higher than 20. Whereas, the chart depicts a fantastic buying opportunity when the PE ratio is less than 10. Only 1923 and 1925 saw negative returns when the PE was less than 10. Also, the outperformance of 10% or more growth in stock prices is clustered in the 10-15 PE Ratio segment.
PE Ratio: Relevance in the Current Scenario
PE investing is basically a prerequisite for common sense investing. A high PE is an indication for bad news on a particular stock (usually), and broader Index (almost always). PE bubbles in the charts above are strong evidence that PE should be on the top of an investor’s list when considering an entry or exit in the market.
Let’s look at S&P 500. The current PE Ratio of S&P 500 is 22. The previous four years have seen PE constantly remaining over 20. Does that mean the PE ratio has lost relevance?
Those considering the PE ratio is outdated or not in tune with the dominance of “growth-focused” tech stocks in the Index are in for quite the surprise. An investor should always remember that “this time is different,” is the rallying cry of an investment expert. However, we know that data never lies. Over 100 years of analysis is proof enough that valuations tend to revert to the mean. Using the PE ratio is an essential tool in determining if you are on the right side of the market.
PE ratio is an important valuation indicator, but it is critical to evaluate it subjectively and judiciously.
When comparing the PE ratio of companies, you should always look at organizations in the same sector, and that is the same size.
Depending on who you ask, Burton G Malkiel classic investing book should be the first on the list of any ambitious investor. Having devoured the first edition in college, I decided to tackle the revised and updated edition (released in 2015) and remind myself why this book still sticks in my mind to this day.
The ‘Random Walk’ which former Princeton economics professor Malkiel takes us on is a nod to the “random walk hypothesis,” a financial theory that argues stock market prices are essentially unpredictable. The premise of the book is to argue that investors hoping to exploit any inefficiencies would be better off eating soup with a fork.
With A Random Walk Down Wall Street now into its eleventh edition, I was particularly interested in highlighting the key parts of this book, with the intention of comparing it to the original. Instead, I decided to review the book as a whole and identify the most interesting aspects of this classic piece.
Walking in Malkiel’s Shoes
The first thing a reader will notice about this book is that it is heavy in content. This should not be off-putting, however, as everything does have a place. What you can expect to find covered in this book are:
The Psychology of Investing
Ever wondered why the human condition is so hardwired to go with the crowd?
Malkiel aims to slam a titanium sledgehammer into a flowerbed of pretty investment adages, axioms, and commonly-held beliefs which are of no substance. According to Malkiel:
“The past history of stock prices cannot be used to predict the future in any meaningful way.”
To substantiate his theory, Malkiel refers to infamous instances of mass-hysteria, such as “Tulipomania” to hammer home his point. There are illustrative graphs in the book for readers to examine, which the author touches upon while recommending that investors ride these ‘waves.’ By investing in the “castle in the air,” investors can profit from backing where the latest trend is or those who believe they are investing in something more solid.
The average reader may find a lot of the information here a little hard to digest at first. Portfolio theory, in basic terms, is having a varied number of investments diverse enough to maximize rewards while minimizing risk. Malkiel highlights that no diversification is strong enough to be impervious to risk, and that the complete minimization of risk shouldn’t be the primary goal of an investor.
The idea of Beta – or the number expressing the close range of an individual stock within the behaviors of the overall stock in the past – is also covered by Malkiel. Investors are urged to pay close attention to stocks with a high beta, as these, in theory, should rise dramatically in a bull market before plunging in a downturn.
Malkiel argues that the idea of Beta is incompatible with specifics and is hard to prove in practice.
Technicals vs. Fundamentals
In the book, Malkiel focuses heavily on the most polarizing issue in stock analysis, which is technicals vs. fundamentals.
Technical analysis – a process which uses former movements of stocks to predict their future movement – is heavily critiqued. Fundamental analysis – which pertains to examining a company to sufficiently value a stock, is also stripped bare. Malkiel frowns on the former, considerably:
“For example, technical lore has it that if the price of a stock rose yesterday it is more likely to rise today,” he writes. “It turns out that the correlation of past price movements with present and future price movements is very close to zero.”
Malkiel argues that technical analysis can be pulled-apart easily enough. Put simply, there are no significant, repeated patterns in stock movements. Malkiel includes a fictitious stock chart created in a test conducted by him and his students while at Princeton, which was created with simple flips of a coin.
Malkiel aims to solidify the belief that stock chart “cycles,” as he puts it,”are no more true cycles than the runs of luck or misfortune of the ordinary gambler.”
While this book is potentially a great asset to the ‘ordinary’ reader, it is very heavy on the use of investing vernacular. Some may find parts of the book a little complex, especially if they are an absolute novice investor.
Despite this, it is well worth a read, even if it takes two or three reads for some of the information to make sense.
There is no doubt that it’s possible to make a profit from trading, but it’s not a way to get rich quick. No matter what the market, successful traders need to be prepared to work hard, to get good returns on their investment. If you are not prepared to work, and learn, then trading might not be the right choice for you.
If you are prepared to work at it, you can succeed, especially if you get a good start. When you first start out trading, a good way of developing your trading efficiency and skill is to use an online trading platform such as mt4 trading. Doing so helps you to reduce the amount of risk involved, and improve your skills in a safer environment. There are factors to consider which will help you to use an online trading platform successfully.
Understand how the market works
Using an online trading platform is not intended to be a quick fix. It can provide you with useful tools and mechanisms to use but it cannot replace in-depth learning about the markets. For instance, if you are a newcomer to forex trading, you need to read all the reputable advice and information you can, as well as creating on online trading account. You also need to make sure that you keep abreast of news and developments that might affect your trading success.
Improve your trading efficiency by using a demo account
When you first use an online trading platform, you will have access to a demo account. You can use this account for the first few months, to help you to get used to the world of trading, before you need to risk any of your hard earned cash. Demo accounts work in exactly the same way as normal accounts, except that you do not actually commit any money to trading.
The account replicates what would actually happen if you committed to a certain trade, but there is no risk involved. This means that you can develop your knowledge and your trading skills at the same time, without any stressful worry about making big losses. Using a demo account in this way should mean that you are more fully rounded, and proficient, as a trader before you make use of a live account.
Make full use of account tools and facilities
It’s not just a demo account that you should make use of, when you register an account with an online trading platform. Trading is not easy, so making use of all the available helpful tools makes sense. This is not to say that you have to use every single tool that is available. As you start to use the platform, you will begin to see that some tools are more useful than others, when it comes to your style of trading.
Take a look at the full range of tools that are available and critically evaluate which ones will be helpful and which ones will simply create an unwanted distraction. The amount of tools that are available will often be dictated by the version of the platform that you choose to use.
Starting to trade for the first time can be daunting. You want to be able to learn and improve your trading efficiency, but you do not want to put yourself at too much risk financially. Registering an account with an online trading platform can help you get the risk protection you need. There is always going to be a level of risk inolved in trading, but using a demo account to start with can help to better prepare you for the risks that are to come; as can using the available tools and information.
There are many people these days who really struggle when it comes to their personal finances and budget. With lots of other commitments to juggle and very little time, it can be challenging to find the time to go through your finances and develop a proper budget or plan. However, it is a very important thing to do, as otherwise, you could find yourself facing financial issues and money worries on a regular basis.
Those who have a range of different financial commitments can find it particularly difficult to budget, as there are so many different payments and companies to deal with. Some people lose control of their spending and budget and simply bury their head in the sand in the hope that it will solve itself. However, this doesn’t happen, and they end up getting into deeper and deeper trouble with their finances. Ultimately, this could lead to your credit score being damaged, which could further impact your financial future.
The good news is that there are steps you can take to budget more effectively and easily. Modern technology has provided us with access to a range of tools and facilities that we never had in years gone by. This include a variety of tools designed to help when it comes to personal finance and budgeting. In this article, we will look at some of the many ways in which modern technology has helped to make budgeting easier.
Some of the Ways in Which Modern Tech Helps
Fortunately, having access to modern technology can help with your budgeting in many ways. One of the things you can do if you struggle to keep track of your income and outgoings is use budgeting software, which you can access with speed and ease online. If you prefer using your mobile device to do your budgeting, you can use a budget app to help you control your spending and manage your finances. There are plenty of apps and software options available to suit a range of different needs, so finding something that suits your requirements should be no problem at all.
It is not just managing your finances that you can get help with by turning to modern technology. You can also turn to tech in order to help reduce your outgoings, which will naturally impact on your ability to manage your money better. For instance, you may be one of the many people who have a large amount of debt and are trying to juggle a variety of different creditors. This can make budgeting difficult, as it become easier to lose track. In addition, if you have lots of high interest debts like credit cards and payday loans, the repayments can be crippling. By going online, you can look at getting a consolidation loan, which you can then use to pay off your smaller debts. You will then be left with one low interest loan to repay and just a single creditor to deal with. This then makes budgeting far easier.
One of the other things you can do by making use of internet technology is get advice on how to manage your finances or your debts. You can now contact a range of specialist agencies that can offer you advice and information online. You can also access a variety of articles that will provide you with more information on how you can help yourself when it comes to managing your finances more efficiently.
A Wealth of Tools at Your Fingertips
In short, access to modern technology and the internet enables you to benefit from having a wealth of financial tools and information at your fingertips. You can therefore look forward to getting valuable advice, assistance, and facilities that will make managing your finances far easier. This could help you to avoid numerous financial issues in the future and will help to relieve the financial strain.
The Dividend Aristocrats are among the highest-quality dividend growth stocks in the entire market. The Dividend Aristocrats are an exclusive group of 57 stocks in the S&P 500 Index, with at least 25 consecutive years of annual dividend increases. Some stocks on the list have raised their dividends for far longer than 25 years.
For example, Walgreens Boots Alliance (WBA) has increased its dividend each year for over 40 years in a row. The stock also has a current dividend yield of 3.4%, which is significantly above the ~2% average dividend yield in the S&P 500 Index. This makes Walgreens one of the best dividend stocks to buy in May.
Walgreens has hit a rough patch lately, due to a difficult environment for brick-and-mortar retailers. But the company is working its way back to growth. In the meantime, the stock is attractively valued, with a high dividend yield and a long history of dividend growth.
Walgreens Boots Alliance is a large pharmacy retailer, with over 18,500 stores in 11 countries around the world. It also operates one of the largest global pharmaceutical wholesale and distribution networks in the world, with more than 390 centers that deliver to nearly 230,000 pharmacies, doctors, health centers and hospitals each year.
Business conditions are challenged for Walgreens right now. In early April, Walgreens reported (4/2/19) disappointing quarterly results. Revenue of $34.5 billion increased 4.6% year-over-year, but missed analyst expectations by $40 million. Adjusted EPS of $1.64 also missed, coming in significantly below the $1.72 consensus forecast. Adjusted EPS declined 5.4% for the quarter, based on the same quarter the year before.
Walgreens attributed the weak quarterly results to significant reimbursement pressure, generic deflation, and weakening overall market conditions in the U.S. and the U.K. Equally concerning, Walgreens reduced its full-year outlook. The company now expects adjusted EPS to be roughly flat in 2019, from previous expectations of 7% to 12% EPS growth. 2019 will be a year of heightened investments in its stores and major growth initiatives, which explains why the company no longer expects EPS growth this year.
Despite its weak fiscal second quarter, Walgreens has a positive long-term growth outlook. This is because pharmacy retail has so far proven to be highly resistant to e-commerce competition. Even in a difficult period, Walgreens grew its retail pharmacy sales by 7.3% last quarter. Prescriptions and pharmacy retail will benefit from the aging U.S. population and corresponding need for more healthcare services. In addition, the company is launching a cost management program that targets $1.5 billion in annual savings to help boost EPS growth starting in 2020.
Even though online retailers like Amazon continue to pose a threat to brick-and-mortar retailers, Walgreens retains significant competitive advantages. This is important, as many retailers without competitive advantages will be put out of business if they cannot compete with Amazon. For Walgreens, its major competitive advantage is its leading pharmacy market share. Its strong brand and thousands of stores have created name recognition with consumers.
Plus, Walgreens is a trusted name in the pharmacy space, which has natural defenses against e-commerce retailers. When people are ill, they will often go to a Walgreens store to purchase medication and speak with a pharmacist. This is the value that Walgreens provides consumers relative to an Internet-based retailer like Amazon.
Walgreens is also very recession-resistant. Consumers are unlikely to cut spending on prescriptions and other healthcare products. Walgreens’ adjusted earnings-per-share declined by just 7% during 2009 – the worst of the global financial crisis – and the company actually grew its adjusted earnings-per-share from 2007 through 2010, following this up with over 20% earnings growth in 2011. The ability of Walgreens to navigate recessions is an important consideration for investors, particularly those who expect an economic slowdown in the years ahead.
Dividend & Valuation Analysis
Perhaps the most attractive aspect of Walgreens as a potential stock investment, is the company’s dividend and history of dividend growth. Walgreens currently pays an annual dividend of $1.76 per share, equaling a hefty 3.4% dividend yield based on the recent share price of ~$52. Walgreens is also a dividend growth stock, with over 40 years of annual dividend hikes, including a 10% increase in 2018. With a dividend payout ratio of just 29% in 2018, Walgreens is very likely to increase its dividend again in 2019.
Walgreens is also a cheap stock on a valuation basis. Based on the company’s revised guidance, Walgreens is expected to generate earnings-per-share of $6.02 in fiscal 2019. The stock has a price-to-earnings ratio of 8.7x. This is a fairly low valuation for a company of Walgreens’ brand strength and profitability. Walgreens stock could easily deserve a higher valuation multiple. For example, a P/E ratio of 13x would still be a modest valuation for Walgreens, but would still generate significant returns for
In addition, the stock has a 3.4% dividend yield, with the potential for EPS growth to add even more to shareholder returns. Overall, Walgreens stock could easily generate total returns well above 10% per year over the next several years.
Walgreens has had a tough year. Financial results have missed expectations, and the stock has underperformed the broader S&P 500 Index by a considerable margin. The company is struggling to adapt in an era of online retail.
However, Walgreens should continue to see strong demand, as its pharmacy business still has a value for consumers. With a strong balance sheet and significant cash flow generation, Walgreens could pursue an acquisition to boost growth.
In the meantime, Walgreens stock is cheap, with an attractive dividend yield of 3.4% that pays investors well to be patient. Walgreens is an undervalued Dividend Aristocrat.
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For retail investors it can make sense to look at what highly successful investors with a strong track record are purchasing. This allows retail investors to find out what quality metrics are important when it comes to stock picking, which, in turn, allows them to emulate investing strategies that have proven to be successful.
One of the investors whose stock picks are widely followed is Kevin O’Leary, the chairman of O’Shares Investments, and a member of the hit show Shark Tank. The O’Shares FTSE U.S. Quality Dividend ETF allows investors to invest into high-quality income stocks through a diversified portfolio, but investors can also look at the holdings of this ETF if they want to be more active stock pickers.
Home Depot is the largest home improvement retailer in the United States, and thanks to its quite large size, with a market capitalization of $211 billion, Home Depot is also a member of the Dow Jones Industrial Index. Home Depot was founded in 1978, and has turned into a major blue chip stock since then. The US home improvement retail market is not fragmented, it is more or less controlled by Home Depot and its smaller peer Lowe’s (ticker: LOW), which is roughly half as large as Home Depot in terms of market capitalization.
Source: Home Depot presentation
Home Depot operates roughly 2,300 stores across the US, in Canada, and in Mexico, which generate a total of $110 billion in annual revenues. The large majority of Home Depot’s stores are located in the United States, which reduces Home Depot’s foreign currency exposure to a minimum.
Recent Earnings Results And Growth Prospects
Home Depot has announced its most recent quarterly results on February 26. During the fourth quarter the company generated revenues of $26.5 billion during the quarter, which was 10.9% more than what the analyst community had expected. One should note that revenues were positively impacted by a fourteenth week during the quarter, whereas Q4 of 2017 only had 13 weeks. The most recent quarterly results continue a strong revenue growth track record that was maintained throughout the last couple of years, driven primarily by rising comparable store sales. Home Depot does not open a large amount of new stores, thus revenues primarily rise due to higher revenues at its existing stores, and due to rising sales of its e-commerce business.
During the fourth quarter same store sales rose 3.2% year over year, which was slightly less than the 5.2% comparable store sales that Home Depot has delivered during fiscal 2018 as a whole. Home Depot generated earnings-per-share of $2.25 during the fourth quarter, which was 33% more than the earnings-per-share that Home Depot has generated during the previous year’s fourth quarter.
Due to the fact that Home Depot does not open a large amount of new stores, its revenues will grow relatively in line with its comparable store sales in the long run. This is enough to generate meaningful sales growth, though, and earnings-per-share growth will grow at an even higher rate, thanks to several factors that play a role. First, rising comparable store sales allow for operating margin gains, as fixed costs do not rise, while gross profits are improving. The operating leverage that results from this has been a relevant driver of Home Depot’s earnings in the past, and the same should be true going forward. Consumer spending continues to rise, and due to a strong economy and low unemployment it is unlikely that this will change in the near term. This means that Home Depot does not only profit from building activity across the US, but also from consumers purchasing at Home Depot for renovations, remodeling, upgrades, etc.
Home Depot’s profits will also be enhanced by management’s goals of improving the company’s efficiency, through measures such as optimizing the supply chain and inventory levels. Last but not least, Home Depot’s earnings-per-share are further positively impacted by share repurchases. These have lowered Home Depot’s share count from 1.7 billion to 1.1 billion over the last decade, and management plans to keep up with buybacks going forward. During the most recent earnings call, Home Depot has announced a new $15 billion share repurchase authorization, which could lower Home Depot’s share count by another 7%.
All in all, Home Depot does not need a large amount of new store openings to hit an attractive earnings-per-share growth rate, which is why we forecast earnings-per-share growth of 8% annually, even if the pace of new store openings remains very modest.
Valuation, Dividend, And Total Return Outlook
Home Depot’s management expects earnings-per-share of roughly $10.03 for 2019, which means that shares are trading for roughly 19 times this year’s profits right here. This is not a low valuation, and even though shares have traded at more expensive valuations over the last couple of years, we nevertheless see some multiple compression potential towards a price to earnings multiple of 18 over the coming five years. Multiple compression could thus result in a ~1% annual headwind to the company’s total returns going forward.
This is more than made up by Home Depot’s strong dividend yield of 2.9%, though. The dividend has been raised by 32% in February, and is now roughly one and a half times as high as the broad market’s dividend yield.
When we factor in Home Depot’s forecasted earnings-per-share growth rate of 8%, forecasted total returns over the coming five years are quite attractive, at ~10% annually, made up by earnings-per-share growth (8%), dividends (2.9%), and multiple compression (~1% headwind).
Home Depot does not look like a high-risk stock at all, due to its strong competitive position, long proven track record, and healthy balance sheet. The company has delivered another outsized dividend hike earlier this year, and provides an above-average dividend yield. When we factor in the compelling total return outlook over the coming years, it is not surprising to see that the stock is among the favorite quality income picks by Mr. Wonderful Kevin O’Leary.
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We’ve all heard the term millenial in the past, and it’s a term that refers to a rather large group of consumers. In fact, everyone with birth years ranging from the early 1980s to the early 2000s, millennials represent the largest population group in the United States and most other developed nations.
This large group of individuals represents an incredible opportunity for investors. The reason is simple, millennial spending is expected to start climbing and continue to do so for years to come. At the moment, the oldest millennials are in their late 30s with the youngest bridging the gap into legal drinking age.
According to data from the United States Census Bureau, as consumers reach their 30s and 40s, their income tends to rise, leading to a rise in spending. This tends to taper off as consumers reach their mid 50s.
Considering the ages of millennials and Census Bureau trends, millenials are likely to become bigger spenders, and that’s great for the companies that cater to this population, and those that invest in them. Below are a few stocks that I believe will see strong growth as millennial spending trends up.
Match Group (NASDAQ: MTCH)
Another great stock that is banking off of the millennial trend is Match Group. The company has helped to redefine how millennials find love, and with smashing success. Match operates a line of dating websites, and is easily the leader in the space.
In fact, if you’ve done any online dating, chances are that you know this company well. While its core brand is Match.com, or simply Match, the company has a long line of strong brands. These include PlentyofFish, Tinder, okcupid, and and six other brands.
However, if you want to see a bit of backup to the statement that the company is the clear leader in the space, just take a look at a few stats. According to the Match Group investor relations website, its subscription base averages around 8.6 million. This has led to LTM revenue of nearly $2 billion as 64% of those that find love online find it using one of the company’s 10 well-known brands.
A core point of value for the company and its investors is its Tinder brand. Today, Tinder is the #1 downloaded dating app. Moreover, it is the top grossing dating app in the world. Not to mention, even outside of the dating realm, Tinder is the second highest grossing app in the world across all categories.
As more and more millennials look to find love online, and have increasing funds to do so, it only makes sense that Match would continue to see strong growth in membership and revenues across its brands, making this a stock that’s hard to ignore.
Etsy (NASDAQ: ETSY)
Finally, we have Etsy. Etsy is a global online marketplace, specifically designed to bring buyers and sellers of unique handcrafted goods together. This hits millennials in two ways.
However, another thing to think about is product interest among millennials. There’s a reason that we’re seeing a rise in craft beer at bars and crafted sandwiches in fast food drive throughs. Millennials are interested in well-crafted goods, whether it be food, drink, or retail items like furniture, trinkets and more. With a focus on the handcrafted product niche, Etsy appeals to millenials in yet another way.
Analyst seem to love the stock too. With 13 analysts weighing in on ETSY, the average rating is a buy. The average price target on the stock is $73.73, representing a potential upside of nearly 20%.
As Etsy continues to grow its audience, offering, and global reach, the potential for gains is incredible. With millennials reaching ages that tend to lead to higher levels of spending, and their increasing appetite for unique goods, this stock has the potential to see tremendous gains.
The company’s name, Mogo, stands for Money-On-the-GO, which is exactly what it is. Mogo is leading the emerging trend of “financial wellness” by delivering a fully integrated solution of innovative financial products that actually help consumers (mostly millennials) manage their financial lives.
Through the Mogo app, Canadians get access to a digital spending account with a Prepaid visa card that makes it easier for them to manage and control their spending, investment products including cryptocurrency, Canada’s first free credit monitoring solution, an ID fraud protection product as well as access to smart credit options including consumer credit and digital mortgage products. The company also has plans to launch a number of additional products later this year which will further enhance their solution and market leadership.
With more than 800,000 members, Mogo has a proven ability to penetrate the market. Not to mention, making an argument that the stock is highly undervalued is a simple thing to do. When compared to its American and European peers, the company is trading at a 75% to 90% discount with a per member valuation of $125. Per member valuations at Chime and N26, the company’s closest comparable U.S. and European peers, are about $500 and $1,175 respectively.
Comparing the company to peers in Canada yields the same results. Lightspeed (TSX: LSPD) is a newly public Canadian FinTech with a market cap at about $1.7 billion. That’s about 18x the market cap at Mogo. On the other hand, when it comes to revenue and growth scale, the companies are very closely aligned. In the most recent quarter, Lightspeed reported revenue of C$20.1 million, seeing YoY growth at approximately 34%. Mogo’s most recent report showed revenue of $16.4 million, with year over year growth of about 57% in core revenue.
It’s also worth mentioning the company’s recent announcement of an agreement to acquire Difference Capital. While the transaction is subject to shareholder approval, once complete, it will put Mogo Finance Technology on strong financial footing, bringing more than C$34 million in cash and monetizable assets.
All in all, Mogo is in a strong position for growth ahead. The company is catering to a growing base of millennials with a craving for technological solutions to their financial questions. With the company’s strong fundamentals along with its leadership position in the massive and highly profitable Canadian banking market, I believe that Mogo is positioned for a significant breakout above its current share price. The company also has six research analysts covering the stock which clearly have a similar view as they all have Buy ratings on the stock with an average target today of over 2x Mogo’s current stock price.
Netflix (NASDAQ: NFLX)
Netflix is the next up on the list, and for good reason. Millennials are all about cutting the cord, leading to companies like Netflix, Hulu, and YouTube being disruptive forces in the entertainment industry.
Nonetheless, Netflix has had a choppy year as a result of dwindling domestic growth, which came in at around 9% in 2018. While the company’s domestic growth is a slight concern, the big story has to do with the company’s work on a global scale.
The truth of the matter is that the term millennial doesn’t only describe Americans. It is a term used around the world, and the upward spending trends are also global. Netflix has penetrated a large audience in the United States, and continues to see some growth in the space. However, looking at the opportunity from a global perspective shows that there is plenty more room for gains.
I’m not the only one that sees the room for growth either. In fact, Analysts are overwhelmingly rating the stock as a strong buy with a price target that suggests a more than 12% potential upside. All in all, if you’re looking to see growth in your portfolio as a result of global millennial spending trends, Netflix is a stock that’s well worth looking into.
LYFT (NASDAQ: LYFT)
One of the pioneers of the ride-sharing industry, Lyft recently made its public debut at just over $70 per share. While the stock has seen a dramatic decline since its IPO, falling to just under $50 per share, the weakness likely presents an opportunity.
LYFT is a company that caters to millennials and has disrupted traditional taxi services. The company’s app connects riders with drivers from their community, taking a percentage of each ride as a service fee.
This is an incredibly important service in cities like New York, Seattle, and many other high-population areas around the United States as it gives millennials a strong alternative to vehicle ownership.
The company’s intuitive app and focus on millennials is leading to strong revenue growth. In fact, in 2018, the company’s revenue climbed by 103%.
It’s also worth mentioning that Uber’s recent IPO could prove to be a positive catalyst for LYFT. After all, uber’s valuation of around $60 billion, those who gain interest in Uber but want a lower cost option to enter the ride share space will likely fall back to LYFT as an alternative.
Moreover, those that compare the two companies will likely see more opportunity in LYFT than uber. After all, Uber revenue only grew by 43% in 2018, well below LYFT’s 103%. Not to mention, Uber saw further deceleration in the last quarter.
All in all, LYFT is providing a transportation solution that is quickly being adopted by the millennial community, leading to strong growth in revenue. As the company continues to disrupt the taxi industry, it is likely to continue to see this strong growth. Moreover, public hype surrounding the Uber IPO is likely to prove to be a positive catalyst for the stock. For these reasons, LYFT may be an opportunity that’s hard to ignore.
The millennial spending trend is likely to open the door to several profitable opportunities in the market. In my opinion, the stocks listed above represent strong opportunities for long run growth as gains in millennial income lead to increased spending in the United States and around the world.
This article was written by Joshua Rodriguez, owner and founder of CNA Finance. Read all relevant disclosures and disclaimers at CNAFinance.com.