Making Hay Monday - February 12th, 2024
High-level macro-market insights, actionable economic forecasts, and plenty of friendly candor to give you a fighting chance in the day's financial fray.
“Insurance: An ingenious modern game of chance in which the player is permitted to enjoy the comfortable conviction that he is beating the man who keeps the table.” -Ambrose Bierce
“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.” -Warren Buffett
“We are at a historic extreme in the amount of money in this very small number of stocks.” -Michael Smith, senior portfolio manager at Allspring Global Investments
A Chubby Pitch
Warren Buffett and his late, very great, partner Charlie Munger, often said they liked to wait for a “fat pitch”. This meant they would sit on cash until an investment came along they thought was right down the middle of the plate and at batting practice speed.
This week’s showcased stock may not totally qualify as the mythic fat pitch, but I’m going to make a case that it is at least on the chubby side. Should it pull back after its recent pop, it would move it much more into the fat category.
It should come as no surprise to Haymaker readers that this name has recently achieved both a multi-year breakout and an all-time high. Of course, so has the stock market itself… but there is a big difference. The primary deviation is that this entity’s overcoming of upside resistance — which, as you can see below, was around $248 — is a function of a dramatic earnings acceleration.
In the case of the S&P 500, it has actually experienced an earnings recession of late, fulfilling one of my anticipations from as far back as 2022. (My expectation of an economy-wide recession was a MUCH less prescient call.) In fact, per the below visual, which we also ran last week, the fourth quarter 2023 earnings estimate for the S&P 493 — i..e, excluding the Magnificent Seven — was still running in the red.
Even including what I often call Heaven’s Seven, S&P profits have been most unimpressive since the start of 2022. While fourth quarter earnings are still being reported, estimates are that full-year 2023 will come in around $203.42 per S&P share versus $201.91 in 2022.
Conversely, this week’s focus name is projected to see 2023 net income up over 50% from the end of 2021. While I spend considerable time discussing stock price breakouts in these pages, earnings range expansions, another term for breakouts, are also extremely significant. In the case of our subject at hand, earnings per share (EPS) had been largely stuck in the $8 to $10 range for about 15 years with a slight upward incline. In 2021, however, there was a decisive breakout to the upside, with EPS hitting $12.56. Much more impressively, 2023 EPS rocketed to nearly $22.
In my experience, multi-year price breakouts synchronized with earnings doing the same are particularly rewarding for those tracking, and acting, on these events. It continues to astound me how few do, including of the professional investor class.
In this case, as you can see above, an earlier breakout happened around $170 back in 2021. Unsurprisingly, this is when EPS were also busting out of their long-lasting range. As I’ve previously conveyed, the longer the range has been in place, the more meaningful is the penetration of upside resistance.
From a valuation standpoint, it is trading at an eminently reasonable 11 times this year’s earnings estimates. As you can see below, that’s close to the low end of the P/E range in recent years.
Admittedly, that’s in no small part due to the profits surge it is experiencing. However, the positive results are projected to continue. Realizing projections are just that, Value Line is ballparking $31 per share circa 2027. The Wall Street consensus is a bit less optimistic at $28.34. Based on its recent earnings momentum, I’m inclined to take the over.
So, what is the name and ticker symbol behind this intriguing situation? As usual, you need to be willing to pony up a little over $1/day to access that information. Of course, I’m slightly biased but I’m convinced it’s worth the modest entry fee… hopefully, far more than that.