Bought a sizeable position for GM at $35.1 USD
Initiated a small position in KORS at $34.93 USD
A truly value investor should always sniff out value stocks regardless of the form. Essentially, this means looking for underpriced stocks in different sectors, different countries, yield vs growth etc. You get the drift — basically under every rock. This would particularly ring true for any Australian investors. Any trade in Australian equities would most probably be a crowded trade. If you don’t believe me, just check out your default option in your superannuation and it will be heavily weighted to Australian shares. The slush of cash flowing into superannuation which subsequent gets pumped into Australian equities results in immense bidding for a small pool of quality Australian companies. Therefore, I see great benefits in investing in international shares.
For any potential converts, there are several ways to invest internationally. One avenue is to use Australian brokers but the commission costs are unnecessarily high and will eat into your profits (especially if your investment amount is small). Another way is to use an international broker such as Interactive Brokers which has more reasonable pricing. The last avenue that I can think of is to invest international via contracts for difference (CFDs). Full disclosure, I have investment interests in two CFD providers i.e. IG Markets and CMC Markets but I don’t imagine having enough sway via viewership numbers to make a difference. The payoff profile when investing in a CFD of a certain company is largely similar to investing in its shares except for franking credits. Also, CFD allows one to apply leverage but this can be a double-edged sword i.e. both gains and losses are amplified.
All of this babbling brings me to the main focus of this post. General Motors (NYSE: GM) and Michael Kors (NYSE: KORS) had just received their latest earnings on the 7 February 2017 and both suffered significant drop in their share price.
GM is the largest automobile manufacturer in the USA. Brands under its umbrella include Buick, Cadillac, Chevrolet & GMC brands in the USA and the Buick, Cadillac, Chevrolet, GMC, Holden, Opel & Vauxhall brands outside of the USA. Analysing GM is simply a numbers game. GM is extremely cheap with a share price of $35 USD and management guided earnings of $6-6.5 USD which gives it a P/E ratio of less than 6X. GM pays out $0.38 USD of dividend per quarter which gives it a dividend yield of 4.5%. It has also $10B USD worth of share buyback remaining and with a market capitalisation of $54B USD, that would equate to a buyback of approximately 20% of its shares. Critics have been ranting on about ‘peak auto’ for some time and has so far been incorrect with 2016 numbers coming in at 17.6M cars sold (2015: 17.5M) .
With a dividend payout ratio of just 25%, GM would still be able to sustain its dividend if America’s new car sales crash and GM’s profits were to collapse by 50%. Its latest earnings results prompted a 5% decrease in share price even when it topped estimates. Sometimes, similar to God, Wall Street works in mysterious ways. I can only assume that the decline in price is due to profit taking because of the YTD run up in share price.
KORS is a semi-premium brand best known for its women handbags. It has seen its share price decline from a high of $98 USD to a current $38 USD which is near to its 52 week low. It is a serial buyer of its own shares with management (and I) believing that its share price is severely undervalued compared to its competitors. Since the inception of the share buyback program in 2014, it has since bought back $2.5B USD worth of shares. Compared to its market capitalisation of $5.5B USD, this is significant.
Like most retailers everywhere else, KORS is facing some headwinds and its share price has crashed by 11% since the latest earnings result. It has seen less mall traffic and its wholesale channel is aggressively discounting its products. To counter this, KORS is pulling its products from the wholesale channel and embarking on growth initiatives like selling smartwatches and increasing its presence into menswear. According to the latest earnings call, management is currently looking at M&A opportunities and other capital initiatives. Its main competitors are Coach (NYSE: COH) and Kate Spade (NYSE: KATE) and both companies has higher valuation than KORS despite lower earnings. With the P/E ratios of COH and KATE at 21x and 19x respectively, KORS looks extremely undervalued at 9x. It should be noted that, unlike COH with a dividend yield of 3.6%, KORS does not pay a dividend but instead focuses on share buybacks. I reckon KORS would be trading at a higher multiple if it introduces a decent dividend in the future.