Olin Corp. (NYSE:OLN) is a manufacturer of chemicals and ammunition which are in high demand right now. With gun and ammunition sales skyrocketing after each mass shooting and subsequent calls by politicians for tighter gun control laws, companies in the industry are benefiting greatly. Trading at only 10.83 times forward earnings the stock looks undervalued right now, especially considering the robust 4.63% dividend yield that provides cash flow in a very tumultuous market.
Analysts seem to agree with a consensus estimate of seven brokers giving the stock a $24 price target which shows 34% upside from current levels. If these analysts are even in the ball park, you have a stock that will appreciate greatly in the short term while providing an excellent yield at the same time. Not many stocks in the current overpriced market can do the same. Another attractive aspect of OLN's valuation is the conservative price to book value of only 1.2. In scary markets like the one we are in now where we just had literally the worst start to a year in the stock market's history, conservatively priced businesses that provide cash flow are a very intelligent place to park your money.
Benjamin Graham used book value as a proxy during his depression era career because it's a very good way to protect capital from losses when appreciation is uncertain. The reason for this is that when a stock is priced at book value then its tangible assets such as real estate, cash and equipment are worth as much as the entire market cap of the business so even if the company somehow went bankrupt, shareholders could be reimbursed for their stock by the sale of assets. This also is what makes high growth stocks like Amazon and others extremely risky because there is so much potential downside if the market turns against you. Even if the analysts mentioned above are way off the mark with their price target and the stock simply treads water for the next year, investors would still be getting a dividend yield that is twice as high as the current rate for a 10-year U.S. treasury bond. But it's unlikely that the brokers' mean target can be so far off.
Another positive aspect of this company for investors is the fact that insiders own more than 10% of the company's outstanding shares which is a very positive indicator because it shows that management's interests are very closely aligned with those of shareholders. Surprisingly, this is not always the case as many executives are paid high salaries with few stock options. When management is monetarily incentivized to act in a way that is likely to bolster the stock, because by doing so they are rewarding themselves, shareholders benefit. It also shows that management is confident in the business' prospects when they buy more stock or hold onto large positions because they know a lot of things about the company that we don't. When they are confident holding huge amounts of shares than it's an indication that we should be too.
With the macroeconomic environment positive for the sale of ammunition, the market volatility as investors scramble for safety, and the outlook for 2016 unclear, OLN provides nice potential upside and great cash flow for the conservative investor. The company's stock is conservatively priced and expected to appreciate by analysts. Finally, Benjamin Graham, the master of defensive investing, stated that the goal of the intelligent investor should be to seek safety of capital and an adequate return and used book value as a way to determine safety. With OLN trading near book value, the stock can be considered safe for investors in this scary environment for stocks.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.