The stock markets have been volatile this week. The CBOE volatility index is up 18%, with downward pressure on the S&P 500 and the Dow. The 10-year treasury yield increase to 2.7% has many institutional investors showing interest in the bond market, which may have some temporary impact on the stock market. Still, the earnings yield and bond yield spread is significant enough to play safely in the market.
Updates on Our Stocks
Thor Industries (THO) and LCI Industries (LCII) – A recent report by Northcoast Research indicating that the RV inventory is reaching an unsustainable level, caused downward movement in the stocks of both Thor Industries (THO) and its leading supplier, LCI Industries (LCII). We will not have conclusive proof on the inventory level until Thor releases its quarterly earnings in March, but if the research findings are right, it would be risky to have significant exposure to either of the stocks.
In the December 14 issue, I wrote this about LCI Industries: “The estimated fair value of the company is 135 per share, which is only 6% above the current traded price. The stock is not cheap, so invest only a portion of your normal position in the stock. And if you hold THO, I would not recommend additional exposure to the RV industry as it’s hard to predict if the RV sales have reached a peak—though there’s room for further growth if millennials show interest in RVs.”
It was a risky bet from a fundamental standpoint. Given the chances that the RV sales have reached their peak, I am revising the fair values of THO to 130 and LCII to 103. I recommend holding THO and selling LCII.
Target (TGT) – In line with our investment thesis on Target regarding its acquisition of Shipt and plan to reduce same-day delivery time, Target has announced that the Shipt will start delivering its products today, and expects Shipt to cover half of its stores by as early as mid-2018. It is yet to be seen how this strategy will turn out against aggressive competition from online retailers. TGT has increased 15% from my initial recommendation in December. I continue to recommend buying target. BUY.
Starbucks (SBUX) reported earnings with comparable store sales growth of 2% globally and 6% in China. I do not expect Starbucks to improve much in the long run. At this growth level and with an estimated free cash flow yield of about 4%, Starbucks is clearly overpriced. I recommend selling SBUX. SELL.
Alliance Resource (ARLP) – I selected ARLP, the only MLP recommendation in our portfolio, for its strong dividend yield of 9.8%, which is backed by consistent free cash flow. This quarter, the company announced a dividend of $0.51/unit, and FY 2018 revenue is estimated to be around $1.78 billion to $1.82 billion. I believe the company will continue to generate free cash flow to afford its distribution policy. I do not expect the stock price to gain much, but it could be a good stock for income investing. HOLD.
Gentex (GNTX) released its quarterly earnings, surpassing estimates. There was a 9% YoY growth in unit shipment and a 7% YoY increase in Sales, indicating some pricing pressure. Gentex grew its operating margin from 39% in Q3 to 39.2% in Q4. Under its new CEO, Gentex continues its innovative strategy in connected cars. The company has reached my fair value estimate, and you may take a profit now. However, based on the recent positive sentiments on the stock, I recommend that you hold the stock until it reaches 25. HOLD.
