- By Dr. Paul Price
For big gains, follow the money.
Value investors seek out stocks that appear cheap on fundamentals. That usually only happens when the markets are getting pounded or the underlying firm is having some, hopefully, temporary problems.
Buying interest from company officers can help ratify your view that a sell-off is an opportunity rather than a value trap.
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Warning! GuruFocus has detected 3 Warning Sign with DG. Click here to check it out.
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The intrinsic value of DG
Two high-quality stocks at rock bottom valuations just attracted major open market interest, which points to the likelihood for future gains.
The first one is Dollar General (DG). Two directors ponied up a combined $1.363 million to own shares in the $75 to $76 price range, down from what was an overpriced annual peak of $96.88. The stock got even cheaper over the next few days, closing on Sept. 2 at $73.32.
Media outlets were falling all over themselves trying to explain why the shares were down while ignoring the spectacular results since DG came public again on Nov. 13, 2009.
FY 2016 and 2017 estimates were trimmed to $4.51 and $4.94. Both would still represent all-time bests for this well-managed company.
As of last Friday, the shares fetched a slightly lower than average multiple on this year's already reduced projection. Its P/E on expected FY 2017 EPS is under 14.9x.
Perhaps those DG directors are on to something. A simple regression to a more typical valuation supports a Dec. 31, 2017 target price of at least $83 to $84. The 25-cent quarterly dividend provides a better-than-bank-account 1.36% current yield while you wait for a rebound.
The recent pullback should not have surprised anyone. DG typically topped out (red-starred periods above) whenever its P/E approached or exceeded 20x current profits. Every sell-off since 2009 (green-starred) has proven to be a great entry point for those with reasonable time horizons.
Norwegian Cruise Line Holdings (NCLH) is another stock with great appeal right now. CEO Frank Del Rio, the company's most informed investor, couldn't resist adding $3 million dollars worth of shares on Aug. 31, 2016 at an average cost of $35.94.
NCLH touched an all-time peak of $64.27 in the fall of 2015, on EPS of $1.86. The mid-point of this year's guidance now sits at $3.35.
The news of his purchase initially sent NCLH flying. It rose briefly to over $38 before settling back to close last week at just $35.61. Media coverage of tropical storm Hermine and the Zika virus might have been taken as short-term dampers.