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Regal Beloit Is Now Morbidly Expensive

Mar. 09, 2021 9:57 PM ETRegal Rexnord Corporation (RRX)2 Comments
Patrick Doyle profile picture
Patrick Doyle


  • When profitability declines by 20% and the stock rises 117%, something's got to give, and it's rarely the case that profits rise to bring valuation back to Earth.
  • Although the dividend is sustainable, the yield is paltry at the moment and there are much better income alternatives elsewhere.
  • In my view, the returns I earned from selling puts are actually far superior to the returns earned by stock investors.

It's been a little over 10 months since I wrote a cautious piece about Regal Beloit (RBC) and in that time, the shares are up a staggering 117% against a gain of "just" 36% for the S&P 500. Much has obviously happened since then, so I thought I'd take another look at the company to see if it's worth buying now. I'll make this determination by looking at the financial history, and by looking at the stock as a thing quite distinct from the underlying business.

I also want to write about my philosophy around short puts, and describe why I think the 8% return I earned in seven months is preferable to the returns earned by stock investors here. This requires some explanation, obviously, so please stay tuned.

I am feeling in a particularly merciful mood, dear readers, and for that reason I'm giving you an "out." I'll present my primary findings in this paragraph so you won't have to wade through the silly jokes and self-congratulation that is sure to follow. I think there's a disconnect when financial performance suffers and when stock prices rise. At some point either the profitability will have to rise dramatically or the stock will have to fall to return the world to "normal."

I think it's much easier for the stock to fall, and that's what I think will happen in this case. Over the past year, profitability dropped by ~20%, and the shares are now trading at a multi-year high valuation. This is unsustainable in my view. Finally, I think the short put trade was preferable to the stock performance here for two reasons. First, a 14% annualised return should never be something to sneeze at. Second, unlike the share price returns, the money I made selling puts isn't in danger of evaporating in an afternoon. I go deeper into my thinking about short puts in

This article was written by

Patrick Doyle profile picture
I'm a quant investment newsletter writer who marries fundamental analysis with the latest research in momentum. Over the past few years, I’ve developed a piece of software that helps me track the level of optimism and pessimism embedded in stock price. I seek to challenge the assumptions embedded in price by profitably exploiting the disconnect between what the market thinks and what is a likely outcome. I invest in those companies that have a greater than average chance of giving us all a surprise in the next few months.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (2)

check-mate profile picture
That’s what you said back in April 2020, or about 100 bucks ago
Technical breakout today...
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