Thursday, November 8, 2012

Three Stocks to Buy During a Frankenstorm

Beware! Hurricane Sandy is coming to town. It began the trip from Bahamas on Friday, causing 40 deaths in the Caribbean, and it could join with winter weather fronts to form a Frankenstorm, the worst super storm in a century. Everybody would remember old scary friends such as Gloria ($1 billion damage in 1985), Hugo ($7 billion damage in 1989), Andrew ($30 billion damage in 1992), Katrina (up to $200 billion damage in 2005) and recently, Irene ($15 billion damage in 2011).
Facing a huge storm, what will you choose to buy in a department or grocery store? Of course, I think the majority of people will stockpile necessity items, such as flashlights, plywood, batteries, and generators. After emergency items have been stockpiled, we would think of pharmacies, food, and gas. Several businesses have been preparing for its customers’ emergency shopping, including generator provider Generac Holdings (NYSE:GNRC), retailer Sears (NASDAQ: SHLD) and Wal-Mart (NYSE: WMT).
Generac, a leading provider of back-up generators for home, has shot up significantly, from $25.60 to $28.30 in just a week. Actually, in the beginning of September, it was only $20.70 per share. So the stock has risen 36.7% within just two months. Aaron Jadgfeld, the company’s CEO said: “This is becoming a must-own product for households, especially for people who live in areas where power quality and reliability are issues.” This company is the leader in the home generator market, with a 70% market share. However, it is not a large company with only $1.93 billion market capitalization. Over the trailing twelve months, it has generated $187 million free cash flow and delivered a return on invested capital as high as 28.7%. In July, it just paid out a $6 special dividend. Even after a recent significant rise in its stock price, Generac is still valued cheaply, at only 5.6x P/E, whereas the industry’s average is at 16.2x P/E.
Based on the past experience with previous storms, Wal-Mart is helping shoppers by providing support in 800 stores and clubs in the path of Hurricane Sandy, by keeping enough emergency goods for shoppers. A Wal-Mart spokesperson said: “We have made sure stores in those areas expecting winter storms were recently stocked with shovels and other items they will need when the storms hit. Our store managers are empowered to help the communities that help us stay in business. They work closely with their local emergency responders to identify community needs and look for ways we can help." Indeed, Wal-Mart always has a long-term view with great community bond. Its share price has shot up since September 2011, from around $50 to $75.10 currently. Wal-Mart is paying investors a $0.40 quarterly dividend, with the yield of 2.12%. It was quite fairly valued at 15.8x P/E, compared to industry’s average of 16.3x. Its PEG ratio seems to be high at 1.7x. At $75.11, Wal-Mart is one of the biggest retailers with $252.5 billion market capitalization.
For Sears, it has prepared well for the hurricane for shoppers. Hundreds of Sears and Kmart stores along the East Coast are stocked with portable generators.  The company suggests that when buying a generator, shoppers should secure a unit large enough to deliver the power they need. Besides generators, Sears and Kmart are loading up wrenches and pliers to turn off gas and water valves before the storm comes. Shoppers can purchase items via its website and via their mobiles too. Sears’ investors must be happy when seeing its stock price gain nearly 6%, from $62.92 to $66.69 within just a day.  Moreover, since January, Sears has been performing extremely well. It delivered to shareholders 129% gain year-to-date. As it is generating a trailing twelve months loss, its P/E ratio is not valid. At $7.1 billion market capitalization, the market is valuing Sears at 1.6x P/B and 61.7x P/CF. Several famous value investors including Chuck Akre, Bruce Berkowitz and its current chairman and CEO Edward Lampert, have been bullish on Sears as they have been loading up its shares since the beginning of 2012.
My Foolish Take
Three stocks are attractive with different reasons. Generac enjoys a market leader position in back-up residential generators with cheap P/E valuation. It also generates good free cash flow with high return on invested capital. Wal-Mart, with its huge economy of scale, still gives shoppers the lowest price ever. With its “everyday low price” strategy, its huge moat couldn’t be taken away easily. Wal-Mart is still the stock for investors to preserve their capital in the long run. Last but not least, Sears is quite undervalued compared to its real estate assets. Following GAAP, its book value recorded its real estate at lower cost or market. Sears is definitely a real estate play for investors. 

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