By Paul Price
Earlier this year, when the market was climbing progressively higher, many traders were longing for a pullback so they could buy in without chasing ever increasing prices. During June’s selloff, traders were less eager to buy. Shares might get even cheaper, they reasoned.
This is always the conundrum: If you buy on momentum, stocks are expensive. Trying to ‘catch a falling knife' can be dangerous too.
In deciding whether a stock is a good buy, it's important to have a target price based on fundamental factors. Only buy when a company is trading substantially below its fair value.
Accenture (ACN) got creamed yesterday after reporting in-line estimates for fiscal Q3 but reducing guidance to about $4.20 for the fiscal year (FY) ending this August. It was down by almost 14% early Friday morning. The stock, which had hit a recent all-time high of $84.22, closed the week at $71.96.
Smart shoppers know when the advertised price of a handbag, car or real estate is a true bargain. That’s only possible if you have a good feel for the merchandise. The best quality stocks stand out against the competition.
Based on those criteria, international consulting firm Accenture looks attractive. ACN merits Value Line's highest possible (A++) financial strength rating while ranking in the top 5% - 10% in the other three major categories.
Standard & Poors also characterizes Accenture as a high-quality, low volatility issue.
The 10-year chart shows all you need to know about Accenture’s creation of shareholder value. EPS have about quadrupled since FY 2003. ACN showed a decade-long 363.6% total return versus 100.6% for the SPY with dividends.
All stocks fluctuate. Valuations swing in ranges from undervalued to overvalued. Pricing is contingent on general market conditions, superimposed on company-specific news. Standard & Poors provides an easy to see history of Accenture’s high and low earnings multiples over the past 10 years.
Traders could have exited ACN at P/E multiples of 19 or higher at some point during every recent year except during the 2008-09 debacle. The already-reduced earnings expectation for FY 2014 is now $4.56 per share. Applying a 19 multiple to that projection leads to a 15-month goal price of $86.64.
The semi-annual dividend provides a 2.25% current yield. Following Friday’s decline, Accenture offers 15% - 25% annual total return possibilities along with above average safety. Did analysts rush to recommend ACN as a great value? Not according to the pre-market headlines.
The stock is a good buy right now. For an extra margin of safety, consider selling a put. On Friday morning, I sold the conservative Jan. 2015, $70 strike price puts at prices ranging from $9.70 to $10.30. My break-even, if exercised, drops down to near the $60 mark ($70 strike price minus around $10 premium for the sold puts).
Shares of industry leader IBM were down in sympathy last week. IBM also looks attractive at last week’s closing quote of $191.29. IBM touched a high of $215.90 just months ago.
I now favor both ACN and IBM for investors with 12 - 18 month time horizons. Buy the shares; sell the puts.
Disclosure: Short Accenture puts. Short IBM puts. I may purchase shares of ACN and IBM in the near future.