Seeking Alpha
Long only, value, growth, dividend investing
Profile| Send Message|
( followers)

Summary

  • Conn's is way oversold.
  • The stock is undervalued based on 2015 earnings and on earnings growth potential.
  • Since the dramatic drop in stock price it has rebounded 9%.

Conn's, Inc. (NASDAQ:CONN) is a specialty retailer of durable consumer products, and it also provides consumer credit to support its customer's purchases of the products that it offers. On December 5, 2013, the company reported third quarter earnings of $0.71 per share, which beat the consensus analysts' estimates by $0.07. In the past, year the company's stock is up 4.85% and is losing to the S&P 500 (NYSEARCA:SPY), which has gained 23.69% in the same time frame. With all this in mind, I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's a good purchase for a portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 15.19, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 9.87 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $3.53 per share and I'd consider the stock inexpensive until about $53. The 1-year PEG ratio (0.44), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 34.75%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 34.75%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 22.5%.

Financials

On a financial basis, the things I look for in general are the dividend payouts, return on assets, equity and investment. The company does not sport a dividend to speak of but is sporting return on assets, equity and investment values of 8.2%, 16.1% and 9%, respectively, which are all respectable values. In this particular instance, I will forego the dividend aspect of the financials because the stock is in my growth portfolio; and in the growth portfolio a stock does not have to have a dividend.

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock is in oversold territory with a value of 24.77. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is about to cross above the red line with the divergence bars increasing in height, indicating bullish momentum. As for the stock price itself ($34.79), I'm looking at $42.94 to act as resistance and $24.74 to act as support for a risk/reward ratio which plays out to be -28.89% to 23.42%.

Recent News

  1. The company was hammered after their credit program flopped. The company reported that fourth quarter delinquencies sky-rocketed causing the stock to drop like a rock falling off a cliff when the news was announced.

Conclusion

The stock is way too oversold in my opinion and this is why I believe it is a buy down here. The majority of the stores are located in Texas and I believe Texas to be a booming economy because of the black gold rush taking place in the Barnett, Eagle Ford and Permian Basin shales. Every stock I have ever watched that has plummeted after an event has always rebounded and I believe this story won't be any different. Fundamentally, the company is still inexpensively priced based on future earnings and on future growth potential. Financially, I believe all the returns are safe and sound. On a technical basis, I believe there is a ton of upside to come. Due to the bullish technicals, low valuation based on earnings, and low valuation with respect to earnings growth I will be pulling the trigger for a huge batch right now.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long CONN, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Conn's Is Severely Undervalued