Does Kohl’s Stock Still Hold Value?

Does Kohl’s Stock Still Hold Value?

Shares of Kohl’s (NYSE:KSS) have risen about 50% over the past year as investors rewarded the department store giant for improving sales trends. However, Kohl’s stock has fallen by about 15% since peaking earlier this year.

Meanwhile, industry conditions are set to become more favorable, mainly due to the pending liquidation of Bon-Ton Stores. Kohl’s stock is also quite cheap, particularly when valued based on its free cash flow. That makes the No. 2 U.S. department store chain a compelling long-term investment opportunity.

Sales growth rebounded during 2017
Up until about a year ago, Kohl’s was struggling just like most of its peers in the department store sector. Comp sales fell 2.4% year over year in fiscal 2016 and 2.7% in the first quarter of fiscal 2017. That’s a big reason why Kohl’s stock lost more than half of its value between early 2015 and mid-2017.

Fortunately, sales trends started to improve in the middle of last year. Comp sales slipped just 0.4% year over year in the second quarter and inched up 0.1% in the third quarter.

Kohl’s sales trajectory then accelerated dramatically during the holiday season. In the combined November-December period, comp sales surged 6.9%. For the full fourth quarter, comp sales rose 6.3%. This stellar performance allowed Kohl’s to post full-year adjusted earnings per share of $4.31– far ahead of its initial guidance of $3.50 to $3.80.

The sales opportunity just got bigger
For fiscal 2018, which began in February, Kohl’s projects that comp sales will rise 0% to 2%. Comp sales growth is expected to exceed the high end of that full-year forecast in the first half of the fiscal year before slowing in the second half of the year.

This guidance may be overly conservative. Kohl’s experienced a sharp change in its sales trend last year, and management probably doesn’t want to overpromise, particularly when the company will face a tough year-over-year comparison in the fourth quarter. Overall industry conditions remain very favorable, though, with GDP likely to grow at a robust pace and consumers benefiting from tax cuts.

Furthermore, Kohl’s could be a big beneficiary of Bon-Ton’s demise. There is significant geographic overlap between the two: 35% of Bon-Ton’s store base is within one mile of a Kohl’s location, and 71% of its stores are within five miles of a Kohl’s, according to a recent Morgan Stanley analysis. This represents a valuable opportunity to increase sales and earnings, which would give Kohl’s stock a boost.

The only department store operator that has more overlap with Bon-Ton is Sears Holdings, which is rapidly losing market share itself. Meanwhile, TJX Companies is the only other fashion retailer with comparable exposure to Bon-Ton’s local markets.

TJX and Kohl’s are both likely to achieve substantial sales gains after Bon-Ton closes the remainder of its stores this summer. TJX probably has more merchandise overlap with Bon-Ton, but it doesn’t carry full collections, so it takes more effort to find the hidden gems in its stores. By contrast, Kohl’s merchandise assortment tends toward more moderately-priced brands, but it will be one of the few department stores left in many of Bon-Ton’s smaller markets.

The timing of Bon-Ton’s liquidation means that most of the incremental sales will come in the second half of fiscal 2018. That should help Kohl’s continue posting solid comp sales growth even as the year-over-year comparisons become tougher.

Kohl’s stock looks like a bargain
Kohl’s initial forecast for fiscal 2018 calls for EPS of $4.95-$5.45. Based on the midpoint of this guidance range, Kohl’s stock currently trades for about 11 times forward earnings.

That’s not as cheap as some other department store stocks. However, as noted above, Kohl’s may be underestimating its sales potential, particularly in light of the Bon-Ton liquidation. Kohl’s surpassed the high end of its initial 2017 EPS forecast by more than 10%, and it’s certainly possible that it could achieve a similar earnings beat this year.

Additionally, Kohl’s has a much better balance sheet than most of its peers. It ended fiscal 2017 with $2.8 billion of long-term debt and $1.7 billion of capital-lease obligations. Just last week, Kohl’s paid down about $500 million of its debt, giving it an even cleaner balance sheet.

Finally, free cash flow has routinely exceeded net income at Kohl’s in recent years. This trend is set to continue in 2018. Based on Kohl’s plans to limit capital expenditures to $700 million and reduce its inventory, free cash flow could be as high as $8 per share this year.

That makes Kohl’s stock look like a bargain at its recent trading price below $60. If the company can continue gaining market share from weaker competitors while executing its plan to sublease excess retail space to high-traffic grocery and convenience stores, Kohl’s stock could potentially reach triple-digit territory in the next few years.


What Will Happen To Facebook Stocks

What Will Happen To Facebook Stocks

For better or worse, Facebook (FB, $163.87) CEO Mark Zuckerberg is getting pretty good at handling Washington, D.C. He just wrapped up his second Congressional grilling in six months, and managed to come out of it looking better than he did going in.

That wasn’t the case in October, when he and executives from Alphabet (GOOGL) and Twitter (TWTR) were all on the hot seat for their role in displaying foreign-purchased political ads that intended to sway the results of 2016’s presidential election.

A curious detail inadvertently surfaced during the hearing, however. Based on the questions the Senate committee’s members were asking – the same lawmakers that, in theory, would be the ones to assemble a bill making Facebook a regulated entity, if they wanted to go that far – it’s clear that many people in Congress have no clue how Facebook works, or even what it really is.

But this lack of knowledge won’t prevent them from thinking about new laws in response to the recent Cambridge Analytica scandal that exposed 87 million Facebook users to an entity that wasn’t authorized to tap into that private information. South Carolina Senator Lindsey Graham flatly said during the hearing, “It could possibly take the creation of new laws and regulations to deal with this platform. But I do believe this: continued self-regulation is not the right answer when it comes to dealing with the abuses we have seen on Facebook.”

If Graham’s philosophy is the prevailing one in Washington right now, Facebook has a big problem. On the other hand, philosophy doesn’t always lead to action – and that sets the stage for a different, more likely outcome.

Congress Probably Won’t Do Much
It’s a sticky wicket. On the one hand, Facebook hasn’t established that it can be trusted with consumers’ personal information. On the other hand, the men and women who would be responsible for creating new laws to regulate how Facebook functions don’t have a firm enough grasp on the Facebook platform to pen meaningful legislation.

Case in point: Utah Sen. Orrin Hatch’s question, “How do you sustain a business model in which users don’t pay for your service?”

From someone else in a different context, the query may have been understood as rhetorical, and leading to a bigger point. That wasn’t the case here. Hatch genuinely didn’t seem to understand that Facebook runs ads. The exchange calls into question whether the senator understood even how Cambridge Analytica could have swayed voter opinions during 2016’s presidential campaigning.

Other unfortunate questions include the result of emailing within WhatsApp (which isn’t an email platform), and Graham’s query, “Is Twitter the same as what you do?” It is, and yet it isn’t, but comparing the two is impossible to non-users of either.

Lawmakers’ lack of knowledge about how Facebook – or the web, for that matter – doesn’t inherently disqualify them from shaping new regulation. In a more philosophical sense, though, perhaps Congress’ lack of understanding of Facebook should preclude elected officials from even trying to meddle, as overreach and underreach are both distinct possibilities. At the very least, they could punt the matter to another body.

The Federal Trade Commission is the best obvious solution. That’s the way Andy Sambandam, founder and CEO of Philadelphia-based data privacy company Clarip, sees it anyway. He says, “Currently, the FTC enforces privacy standards under its power to prevent deceptive trade practices. It will most likely continue to be the FTC, as both the House Browser Act and the Senate Consent Act will keep it there.”

He adds, “Both the House Browser Act and Senate Consent Act provide for greater transparency and control for consumers. Although they wouldn’t eliminate the risk of another Cambridge Analytica, they would be a solid first step to protect the data privacy of Americans and increase trust in technology businesses.”

The solution may be as simple as a phone call to FTC Commissioner Maureen Ohlhausen, asking her for tougher enforcement of privacy violations, and greater clarity as to what’s allowed. The commission also can make new rules as needed regarding “unfair or deceptive practices.”

But even that may be the overreach some Senate committee members fear.

Andrew Selepak, director of the University of Florida’s graduate program in social media, says, “There simply isn’t the political will to regulate Facebook. Even if laws are proposed and grand speeches made on the House and Senate floor, social media and the web work by collecting our data and sharing it with third parties.”

Ergo, if consumers are expecting meaningful changes in the way its privacy is protected by Facebook – and all internet-based companies, for that matter – the bulk of any paradigm shift is going to be made voluntarily.

That’s the direction things seem to be going for Facebook.

“Mark Zuckerberg has now told Congress he plans for the company to limit contact data, provide new Terms of Service, curb ad targeting and reviewing political ads before they go live,” says Baruch College marketing professor Robb Hecht. “Zuckerberg gestured to a version of Facebook which people would pay for and be ad-free. He also suggested political campaign advertising would be reviewed before going live on the platform.”

However, it’s not as simple as it sounds, Sambandam says. “Facebook can’t self-regulate on privacy because it is simply not in their business interest – their revenue model highly depends on leveraging usage data and selling it to advertisers,” he says. “Even if Facebook could regulate itself, it is unlikely that other businesses will adopt the full range of privacy protections needed without government regulation.”

Realistically speaking, Facebook likely will apply some sort of hybrid solution to the problem that doesn’t exactly lead to the establishment of new regulations. Zuckerberg may impose new internal rules – some of which Hecht theorized – that passively win the unspoken approval of Congress, resulting in no required action on their part.

It’s a slight step back from his vocal support for the “right” regulation of Facebook. But it’s still a victory for FB and its shareholders, though, as it allows the social networking giant to shape the very rules it will have to play by.

Bottom Line
While the recent testimony from Zuckerberg to a Senate committee willing to explore and act on the matter of online privacy looks like it resulted in progress, once the dust settles, it will become clear that little was actually decided.

That’s not to suggest the matter is going away and that Facebook will be back to business as usual within the next few days. If nothing else, privacy activists have enough fodder to fan the flames for years to come. Facebook knows it has a trust issue to resolve, too. Changes are coming, even if we don’t know exactly what they are. But they likely will come from Facebook long before Congress has time to put meaningful regulation of its own in place.

Assuming Facebook can stick to its own standard after that, Zuckerberg should find himself out of the public’s crosshairs – at least for this reason. Congress doesn’t want to ask any more embarrassing questions either.

Facebook’s users, like shareholders, are winners too (relatively speaking). While advertisers may not be allowed to be quite as intrusive as Cambridge Analytica was, people with active online personas still are giving up massive amounts of data about themselves for advertisers to analyze. That’s why Facebook is, for the time being, still “free.” Even with a much higher privacy bar, Facebook still will know enough about you to deliver accurately targeted ads.

Zuckerberg may be better positioned than ever, in that regard. He has been redeemed in the eyes of Congress and Facebook users, and he didn’t have to give up that much.


Should You Invest In China?

Should You Invest In China?

The notion of human workers being displaced by cheaper, more skilled robots has been circulating for years now. Mostly to no avail. Great strides have been made in the fields of robotics and automation, but to date, we haven’t actually seen this great shift in the workplace.

Read more

What To Do When Stocks Dive

What To Do When Stocks Dive

As those who have followed this column for a while know, I become nervous during stock market rallies and practically gleeful during market corrections. So when the market dropped by 7.8% over a one-week stretch in early February (which happened to contain my birthday), I considered it a gift.

Read more

What’s Going On With Boeing Stock?

What’s Going On With Boeing Stock?

The Dow rebounded from back-to-back down sessions, climbing 0.3% on Wednesday, Jan. 31, to end trading at 26,149. Credit much of the gain to the strong performance of Boeing (BA), which jumped 5% to $354.41 a share. As the highest-priced component of the industrial average by far, the aerospace giant holds the biggest sway in the price-weighted Dow.

Read more

When Is The DOW Hitting 50k You Ask?

When Is The DOW Hitting 50k You Ask?

The Dow Jones industrial average index (DJIA) opened 2018 just shy of 25,000 on Jan. 2, and a little over two weeks later it already had topped 26,000. I was recently asked when I thought the Dow would reach 30,000. Since stocks are the long-term piece of an investor’s portfolio I think this question misses the mark. The better question is, when will the Dow double to hit 50,000?

Read more

Government Shutdown To Cause Disastrous Snowball Effect

Government Shutdown To Cause Disastrous Snowball Effect

Congress is working on its fourth stopgap spending bill since the 2018 fiscal year started in October 2017. If it can’t pass a bill by the end of Friday, Jan. 18, America could suffer a partial government shutdown – and even if the Legislature does get the job done, it will merely kick the can down the road to next month, where another impasse may loom.

But whether it’s Friday, or in February, or whenever – if the government shuts down, that does not mean the bull market will too.

It’s understandable if investors are getting nervous. They’re celebrating the market’s record sprint to Dow 26,000, and now the folks in Washington, D.C., look like they might just dump something in the punch bowl.

A government shutdown is serious business. It creates chaos and hurts the economy. Even if lawmakers come up with another last-minute, stopgap funding bill, that just creates more uncertainty down the road. And as you may have heard, the market hates uncertainty.

With the clock ticking down, investors are rightly wondering what they should do in the event of a government shutdown. We’re here to help. Here’s how to handle the situation in three easy steps:

Don’t Panic
Stocks are at all-time highs. By some measures, they’re more expensive than they have been in nearly a decade, with the Standard & Poor’s 500-stock index going for more than 26 times trailing 12-month earnings. Moreover, the current bull market is the second-longest in history, just months away from reaching the nine-year mark.

It’s natural, then, to worry about headlines that could put an end to the rally.

However, neither worrying about government shutdowns nor the actual shutdowns themselves are novel experiences for equity investors, experts note. And it always has worked out OK in the past.

“The market has seen this before, and while the short-term reaction is unpredictable, it tends to be short-lived,” says Oliver Pursche, chief market strategist at Bruderman Asset Management.

Indeed, there have been 18 government shutdowns since 1976, according to LPL Financial and FactSet. They have ranged in length from one to 21 days, and have produced an average loss for the S&P 500 of – wait for it – 0.6%. Even the worst loss, from September to October 1979, was a mere 4.4% that the market clawed back by the start of 1980.

Historically speaking, the market doesn’t seem to care about whether Washington shows up for work.

Buy Dips
Investors still should be at least prepared for a potential hiccup in the markets – that’s just prudent planning. After all, a short government shutdown would affect some small level of spending, which could put an unexpected blemish on what’s otherwise expected to be a rosy 2018 for corporate America.

But rather than being ready to head for the hills, investors should put together a shopping list.

A massive corporate tax cut promises to boost profits for many American companies. And a repatriation tax holiday on overseas cash has numerous corporations bringing home billions of dollars, much of which is being pledged toward new jobs, wage hikes and other investments that should fuel domestic growth. That all points to continued gains for stocks – which is why a government shutdown-sparked drop in the market should be viewed as a dip-buying opportunity.

After all, the idea is to buy low, and when estimated earnings-growth rates are taken into account, stock prices don’t look so out of whack. The S&P 500 trades for a bit more than 18 times analysts’ expectations for future earnings, according to data from Thomson Reuters. That’s not much higher than its long-term average of 17.6, according to FactSet.

Any pullback in share prices, then, will afford investors an opportunity to buy stocks at valuations closer to historical norms.

Enjoy the Ride?
If anything, the market seems to have almost developed an appreciation of government shutdowns. The S&P 500 has actually delivered gains the past three times Congress couldn’t agree on a spending bill.

When the government was closed for 16 days in 2013, the S&P 500 rose a whopping 3.1%. (See the accompanying table, courtesy of LPL Financial and FactSet.) A 21-day shutdown from December 1995 to January 1996 resulted in a 0.1% increase in the benchmark index. And a five-day shutdown in November 1995 delivered a gain of 1.3%.

With numbers like that, investors should be praying for as many shutdowns as they can get.

That is said in jest, of course. But this does hammer home the point that Wall Street does not view government shutdowns as top-priority bear triggers. Why? Because they ultimately have little effect on what actually moves share prices.

“Markets rise and fall based on economic conditions and corporate earnings,” Pursche says. “And right now, it looks like both are going to continue to rise, which should bode well for the market. In short, ignore the news headlines and focus on what matters – data, and the data looks good.”


The Only Stock Index Fund You Will Ever Need

The Only Stock Index Fund You Will Ever Need

Every year or so, I pen a column about how to invest for the long haul using just a handful of Vanguard index funds (read the latest version: “6 Best Vanguard Index Funds for 2018 and Beyond”). Without fail, this article is more popular than anything else I write for Plainly, keeping investing simple is a goal of many investors. Unlike me, most folks don’t relish the prospect of spending endless hours researching funds.

Read more

Top Stock Picks For The New Year

Top Stock Picks For The New Year

Think the U.S. stock market will gain another 20%-plus in 2018? Guess again. With stocks richly priced, the bull market nearly nine years old, and the Federal Reserve likely to raise interest rates three times in 2018, expect much lower returns.

Read more

New Insight Into ‘Buy-And-Hold’ Tactic

New Insight Into ‘Buy-And-Hold’ Tactic

If you Google “buy-and-hold investing,” you’ll easily find dozens of articles that say the strategy is tried and true.

And you’ll find almost as many that say it’s dated and overrated.

Which is accurate? A lot depends on the individual investor.

Simply put, buy and hold is an old-school passive investment strategy that emphasizes long-term growth over short-term thinking or market timing. An investor who employs a buy-and-hold strategy actively selects stocks and mutual funds, but once that’s done, isn’t concerned with short-term price movements and technical indicators.

An investor’s age plays a role with buy and hold
The strategy generally makes sense for a younger investor who is accumulating assets for retirement but doesn’t plan on tapping into them any time soon. Younger investors usually have years, or even decades, to recover from negative swings in the equity markets.

For example, during the 2008 market crash, when the S&P 500 lost 51% in less than a year and a half, many investors grew scared and sold their holdings at a significant loss. Those who lost the most were the ones who got out of the market near the bottom and failed to participate in the big rebound that followed. Hanging in there paid off for those with a longer-term focus.

But for the older investor who is at or near retirement, this strategy may not work so well. If you were fully invested in the bear market of 2008 and already taking withdrawals, you may have had to take a 40% reduction in income to preserve your assets long enough to not outlive your money.

Buy and hold also may be a bad idea if you don’t have a lot of money to invest, as big pullbacks in equities can all but wipe you out — especially if you end up needing those funds while the market is down. That’s why after the 2000-2002 dot-com (“dot-bomb”) bubble, many market commentators, including author and Fox Business anchor Lou Dobbs, said, “You shouldn’t invest money in the stock market that you can’t afford to lose. Period.”

You may want to rethink the ‘4% rule’ too
Old rules of thumb are hard to let go of in any situation — and the financial industry is no exception. Another popular strategy dating back to the ’90s, designed to “ensure” that your money would last at least 25 years in retirement, is the “4% rule,” which says a 4% annual withdrawal rate from a typical portfolio should be a “statistically safe” amount, although not guaranteed to last a lifetime.

Recently, experts from a variety of sources have said the 4% rule is no longer realistic, mostly because of lower interest rates, longer life expectancies and recent markets showing much larger than normal corrections and recovery periods of five years or more. Some are now saying the percentage should be 3% or less. In 2013, the folks at Morningstar published research that found retirees who want “a 90% probability of achieving retirement income over a 30-year time horizon and a 40% equity portfolio” should withdraw just 2.8%.

Based on those numbers, if you had $1 million in assets, you would be safe to take out $28,000 per year. Most people likely would say that falls far short of what they’ll need in retirement.

Taking another direction instead
So, what else is there if you don’t want to run out of money and you need to use savings and investments to supplement your other guaranteed-income sources?

An increasingly popular strategy is to use a fixed-index annuity with a guaranteed lifetime income rider to create another dependable income stream to go along with your Social Security benefits and pension income.

These annuities do not directly participate in the market, but earn interest credited to the principal — capped at a certain amount — when the market goes up. Your principal is kept safe. You participate only in the market upside (up to the cap, but if the market rises above that, you wouldn’t share in those higher gains). You don’t lose principal when the markets pull back.

Because this is an insurance contract with guarantees and protections provided by the insurance carrier, it can be a good way to keep a portion of your assets safe. By adding an income rider, the carrier is able to guarantee your income for as long as you live and could pay out at a rate as high as 5% to 6% or more, depending on your contract terms and your age. There are almost always fees associated with riders offering guarantees, so it is important to understand how the fees work, including how they are calculated, if they can be changed during the contract period, and how they may impact the growth and death benefits of the contract. It is worthwhile to educate yourself on the costs and benefits to make sure they make sense within your retirement income plan.

If you haven’t heard about this type of annuity from your broker or adviser, it’s probably because it is not a security, it’s an insurance product, and doesn’t fit under the “Wall Street umbrella” or typify the normal brokerage-house model offering. More often, you will find these guaranteed-income products through independent financial advisers who also have an insurance license. Financial advisers are required to work as fiduciaries and have a legal obligation to put their clients’ interests first.

Bottom line: Don’t depend on old rules of thumb to get you through retirement. Keep an open mind and check into all the options available to you.