143,000,000 is a HUUUUUGE number. That’s how many American’s were affected by the disastrous Equifax data breach. Personal data including dates of birth, credit cards and more were obtained as a result of this breach. Today, via CNBC, we have learned that consumers were redirected to a Phishing website by Equifax themselves.
Jim Cramer has publicly called for the CEO’s resignation on Sept. 14 on the CNBC morning segment.
So why am I talking about them today? One of my favorite writers and my good friend Dr. Paul Price from TheStreet.com, wrote a very interesting article about Equifax yesterday and I strongly suggest that you read it and follow him. For the full article, click on this link:
To summarize his thoughts, Equifax was $147 a few weeks ago, which was a record high. After Cramer called out the CEO, the stock had plummeted 39% to $90. Is it time to buy EFX now, or would you be catching a falling knife? I’ll get to that in a second, but before I do, Dr. Price reminded us of previous disasters with other well know companies and how things panned out. The first example was BP and the 2010 oil spill. The stock quickly fell from around $60 to $27. Investors who took advantage of this drop in price were rewarded quite handsomely just 8 months later when BP rebounded to $49.50. That’s an impressive 84% return in less than a year.
In full disclosure, I was scared to death of this situation, so I didn’t buy BP.
This chart below is from his article:
Another example is when Walmart had the Mexican Bribery scandal. The stock fell quite a bit, but then it rebounded from $57 to $77 in 6 just months. This wasn’t as much of a news event as BP, but it was still bad enough to quickly spook investors out of the stock. Smart investors who took advantage of this “news event” decline made a nice 35% return on a stable company that ain’t going anywhere (my mom would be ticked off at me for saying the word ain’t…it’s not proper English).
This chart doesn’t look like much of a drop, but the rebound was very significant.
Lastly, Target had a data breach fiasco in late 2013. After the initial drop, TGT traded flat for close to a year, but then going into the holiday season in 2014 it finally picked up steam. Target was on my watch list for a while. I was a big fan of the company, the financials looked great, and for a dude who hates shopping, I’ve always liked the customer experience in their stores. It was on my watch list because as much as I liked the company, I never liked their valuations. It always seemed to be trading at an overvalued level. I wanted to get in, but not at those inflated prices. Once this data breach occurred, I hopped right on it. Prior to this data breach, Home Depot and a few other companies had similar issues, albeit not as severe as TGT, but they came out of it unscathed. I didn’t think this would be a long term problem for TGT, so I got in. This chart shows the low of $54.70 climbing 40% to $76.60 by the end of 2014, but just a few months later (not on this chart) it kept climbing to the mid-$80’s.
So let’s take a look at the longer term numbers for Equifax. Here is a fact sheet from Value Line:
Here are some of their growth numbers per share since 2009 (note that each and every year, they have grown consistently. There hasn’t been one year with any declining numbers):
Revenue – Up 100%
Cash Flow – 130%
Earnings – 161%
Dividends – 875%
Since 2009, Book Value Per share has grown 105% with just one year (2014) where there was a pullback from the previous year. I also like the Net Profit Margins at 15% or higher too.
When I do a thorough analysis of a company, I go through all 50 items on my Investment Checklist. What I did here was just look at a 30,000 foot view of their financials, but it definitely looks like a solid company. Take a look at these Value Line Scores:
I also ran a few numbers to get a potential Target Price based on some of their historical numbers. I use 13 calculations to do this, but I will share 2 easy ones with you. The first one looks at their Historical PE. For EFX, their historical PE since 2010 is 17.6. This represents a “normal” or “fair” valuation compared to their own history. I multiply that by their current earnings, which are $6.10/share. 17.6 x $6.10 = $107.36. Currently the stock is at $96.86.
The other calculation I do is to divide their current dividends per share, which is $1.56 by their average historical dividend yield. Going back to 2010, the average dividend yield is 1.34%. $1.56/.0134 = $116.34. Using this method, it looks like the current price may be favorable. How does this look compared to other target prices? Here are a few that I found:
Morningstar – $122
Yahoo Finance – $124.85
MSN Money – $112.50
Tip Ranks – $130.20
Yahoo Finance, MSN Money, and TipRanks are all free services.
There is definitely some intrinsic value here. Not that much, but there is some. Is the bad news for Equifax over? I have no clue. Since I don’t have a clue, I could be at risk of catching a “falling knife”. One of the tools I use to see when the selling has subsided and when the big money is starting to buy again is to look at some short term indicators. The first is the Williams % R indicator, and the other three I learned from Phil Town. They are the Stochastics, MACD, and Moving Average. When I get 3 of the 4 indicators turn Green as represented by the arrows below, I feel confident that the selling has subsided. Currently, the W%R looks like it will turn green today, but in the black chart below, the Moving Average, MACD, and Stochastics are still red. This tells me to wait.
By using these short term indicators, you will miss some of the upside, but as a risk management strategy, I am willing to give up some of the upside, especially when there is a lot of upside, to give myself some confidence that I am getting in there when the big money is getting in too. To me, this reduces the chances of catching a falling knife.
If you don’t want to use the indicators and you aren’t ready to buy at these prices, then another strategy to play this would be to sell some put options, aka writing a put option. Volatility plays a big role in the pricing of options. Since there is a ton of volatility with EFX now, prices are VERY expensive. That doesn’t bode well if you are BUYING options, but as a seller of options, we are collecting that expensive premium.
If I sell the January 2018 Put option of EFX, and I am selecting a potential purchase price of $85 (the Strike Price), I will be collecting $5.27 today, September 21, 2017. That means that I get paid $5.27/share to sit and wait for EFX to come down to a purchase price that I am comfortable buying at. If EFX does not fall to that price by the January 2018 expiration date, I don’t have to do anything. If EFX does fall to $85 or lower, then I have to buy the shares. If that happens, my cost basis is $79.73 ($85 – $5.27). That is a current discount 21% from the current price, but it’s a whopping 49% discount from the potential target price. I added my two intrinsic value calculations as well as the 4 target prices from Morningstar, Yahoo, MSN, and Tipranks to get an average price. The average of all six is $118.87.
Value Investing goes against conventional wisdom at times. We are buying companies that currently suck. That can be scary, but if we take away our emotions, and just look at the numbers, it can be very profitable.
“Buy when others are fearful”, some investor dude named Warren something, said this once before. Great, fundamentally sound companies are only offered at a discount to fair value when they are out of favor. There is no other reason why an excellent company would be trading for less than its full value.
On a side note, famous Value Investor and Hedge Fund Manager, Monish Pabrai once said in an interview that most of his trades are not his own ideas. He’s not ashamed to admit that he gets most of his investment ideas from investors, such as Warren Buffet and others, who are wealthier and smarter than he is. He follows other portfolio managers, looks at the SEC’s 13 F and 13 D filings, etc. I do the same thing and many of my most successful investments were ideas I got from reading Paul Price’s daily articles.
Don’t ever invest without a checklist. There are a lot of things to look at and missing something could be very costly.
Download your free copy of “The Investment Checklist” by Tom Vilord
For more information on learning about our 13 Valuation Calculations plus much more, click here: http://www.wallstreetvalue.com/learn-to-trade-like-the-pros/value-investing/