A Great Bargain In Today's Fully Valued Market

| About: Conn's, Inc. (CONN)


Conn's lost almost half of its value a few months ago, when the company reported that the delinquency rate of its customers rose from 8.5% to 8.8%.

The stock is now trading at an attractive P/E of 13, and is expected to grow its EPS by 23% next year.

Some insiders have already grasped the opportunity, and David Einhorn has acquired a 9% stake in the company, characterizing the concerns as overblown.

This year the market has been consolidating around all-time highs so it has become increasingly difficult for investors to pinpoint great bargains. As always, it is almost impossible to find a popular stock trading at an attractive price. On the other hand, the most prominent way to find attractive valuations, particularly in today's fully valued market, is to monitor some unpopular stocks. Conn's (NASDAQ:CONN) is a specialty retailer that sells almost every kind of home equipment while it provides flexible in-house credit options to its customers.

Conn's has plunged from its all-time high ($80) to $45 in the last 5 months, losing almost half of its value in one day, in which it announced that the percentage of its customer portfolio balance that was over 60 days delinquent rose to 8.8% from 8.5% a quarter ago and 7.1% a year ago. That factor and the lower than expected sales increase (the company expected more than the realized 45% rise year on year) led the company reduce its outlook for its earnings per share (EPS) of 2015 from $3.90 to $3.55.

The respectable investor David Einhorn grasped the opportunity and purchased a significant 9% stake in the company, stating that the concern was overblown. Einhorn has proved correct in almost all his major recent investments, such as Apple (NASDAQ:AAPL), Micron Technology (NASDAQ:MU) and Marvell Technology (NASDAQ:MRVL). Moreover, there have been significant insider purchases of Conn's stock in the last 3 months, which is a positive sign for the stock. In addition, there is a great short interest (31%) in the stock, which makes the stock even more eligible for an abrupt upward move.

From a fundamental point of view, the stock trades at a forward P/E 13, which is relatively cheap. Even better, the expected earnings per share of the next year are $4.34, so the current stock price ($45) represents a great bargain if the expectations materialize. In my opinion, the company can meet the expectations, as it has only 79 stores and hence it has ample room to grow. As per its last presentation, the company will open 15-25 new stores and is one of the very few retailers expecting 5%-10% growth in its same-store sales. Although the retail sector has become highly competitive, Conn's has focused on a niche market, and hence it can achieve its projected growth rate.

In reference to the great concerns over the increase of the delinquency rate of its customers, it is important to note that almost all the loans originating before 2013 have been paid off by Conn's customers, with a relatively small percent written off. Therefore, all the concerns focus on the remaining balance of $191M of last year's loans and this year's loans. However, the company earned a profit of $93M last year and has a very strong balance sheet with a net debt of only $104M, less than this year's expected net income. Therefore, even if the delinquency rate of the new loans increases to 12%, the company will readily digest it. It should be mentioned that such a hike is unlikely, as the delinquency rate has fluctuated between 6% and 10% in the last 4 years.

To sum up, I believe that the panic over the recent hike in unpaid loans has been overblown, thus presenting a great bargain. Investors should try to utilize such opportunities now that the market is at record levels and great opportunities are rare. From a technical and a fundamental point of view, I recommend holding the shares up to $55, which represents an upside potential of 20% from the current level. The company is reporting its quarterly earnings on June 2nd.

Disclosure: I am long CONN. 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.