I came in this morning and noticed one of the stocks I follow reported earnings this morning. Shares of Big Lots (BIG) are up about 10% after reporting better than expected bottom line results. I haven’t had a chance to read through the full results yet, having just glanced at the headline results, but this is an example of a classic situation I try to take advantage of…
Big Lots has been appearing on the 52 week low list (a list I check daily for possible investment ideas) on and off for a number of months. I’ve had it on my watchlist for some time as well. I might do a deeper analysis of the numbers on the income and balance sheet later, but here are some basic valuation metrics:
- 2.4 Price/Book
- 9.8 Price/Earnings
- 0.3 Price/Sales
- 6.1 Price/Cash Flow
These basic quick and dirty metrics are near or at 10-year lows relative to BIG’s own history. The company has been interesting to me because of improving profitability metrics in the last 10 years. Take a look at the trend in ROE and ROI:
This is the 10-year history from 2002-2012 (left to right). Management effectiveness has clearly been improving. I haven’t bought the stock because I have ideas I think are better at the moment, but despite a 10% jump this morning, I will still keep an eye on BIG. It remains close to 3 year lows, which has been shown over time to be mean-reverting (stocks at 2-3 year lows tend to outperform in the next 2-3 years).
But at a more basic, simple point of view, BIG is another example of a stock that has been neglected by the market. At the first sign of good news, the stock jumps as investors hope that a turnaround could be in the works. I like to take a longer term view so I look at the 10-year history of the company income and assets, as opposed to Wall Street that loves to analyze quarterly and yearly results.
This disparity in time frame focus is what causes inefficiency on a 3-5 year time frame, allowing you to buy what the market undervalues and sell what the market overvalues.
In other words, the market places more importance on the next 6-18 months, ignoring the potential 3-5 years out. Thus, the market tends to undervalue stocks with potential problems on the 6-18 month horizon. And that is how we make money. We buy stocks with near term problems as long as we feel that the business will be okay 3-5 years from now. We methodically acquire numerous undervalued stocks as they are offered by Mr. Market, knowing that on balance, these stocks go up more than others over time.
It’s just simple, old-fashioned Ben Graham.
Disclosure: Although I have BIG on my watchlist and may initiate a position at some point in the near future, I don’t currently own shares.