Recently, I read from an SA article that the S&P 500's P/E is at a historical high of 21, while the normal is 15. The market is overvalued! That is true for the overall market, but for individual stocks, there is value to be found. Kohl's (NYSE:KSS) is one such opportunity.
Kohl's current P/E of 9.6 is at a 10-year low! Its five-year average P/E is 13.5. With the 2012 earnings per share ('EPS') of 4.3, and the five-year average P/E, we get the fair value of $58.05. That's a 38% upside from the close price of $41.95 on Jan 9, 2013.
It didn't come as a surprise then that Kohl's Price/Book, Price/Sales, and Price/Cash Flow are also at their 10-year low.
In fact, Morningstar currently gives Kohl's the maximum five stars, meaning the stock is at a discount compared with Morningstar's estimated fair value. Learn more about Morningstar rating for stocks.
Its debt-to-equity ratio is 0.75 and has a free cash flow of $642M, which is plenty to pay for the coming dividend (expected ex-dividend date in March).
In fact, Kohl's has a strong history of share buybacks. It reduced outstanding shares from 346.73M to 271M in the past 10 years. That is, a 21.8%* decrease in the number of shares. This is good for shareholders because as the number outstanding shares decrease, the shareholders own a larger piece of the company.
* Calculated by (346.73M - 271M) / 346.73M
To add to the excitement, Kohl's yields 3.05%. So, you get paid nicely to wait for the price to return to fair value.
Since August 2010, Kohl's has been trading within a channel. Currently, it's at the low end of that channel. In fact, KSS's price has been under the 200-day moving average for a couple months. Even though we don't know how long it will stay under it for, in the long term, there's only one direction for it to go -- back to its fair value.
Kohl's is an undervalued company, with a margin of safety, that yields north of 3%. The long-term investor can buy some now or wait for its price to safely cross the 200-day moving average before entering.
Additional disclosure: Resources: Google Finance, Morningstar, vuru