Friends,
Last week, I (Stoffel, here) was preparing a lesson for my Stock Investing Mentor community. We were focusing on valuation -- specifically, on using yields.
In preparation for that lesson, I stumbled on one of the "cheapest" stocks I've ever seen:
- Over the last 12 months, free cash flow (FCF) has increased 350%.
- It has a FCF Yield of nearly 50% -- meaning it trades for 2x FCF.
- The company's dividend -- which has been paid every year since it started, with the exception of a break during the pandemic -- is yielding 3.2%
- It is currently authorized to buy back $2 billion worth of shares -- even though its entire market cap is just $1.7 billion!
And all of this is after the stock rallied 160% since last April.
But as one of our community members correctly pointed out, this doesn't signify a cheap stock.
It signifies a stock the market thinks is about to die!
The company behind that stock is Kohl's Department Stores. And based on just about any metric, our community member is 100% correct.
Since peaking in 2018, sales have been falling for seven years. That's exactly what we call a "Phase 6" company -- one in perpetual decline.
And if you're familiar with our Business Phase Analysis, you know that if a company is in Phase 6, all valuation methods get thrown out the window as there's virtually no price you should be willing to pay for it.
What's the point of all this?
You can take pretty much any set of statistics you want and build a compelling "Kohl's is cheap!" narrative. But if you don't surround that narrative with real-world context, it can lead you to very dangerous places.
Never forget that Blockbuster, Radio Shack, Bed Bath & Beyond, and Circuit City all looked "dirt cheap" right before they wiped shareholders out.
In investing and in life, you should always look at the numbers first. But if you don't ground those numbers in a real-world context, you're likely going to be missing the forest for the trees. And over the long run, that can lead to disastrous consequences.
Wishing you investing luck in the months ahead,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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