A Low Risk Play with Kohl's – the ‘King of Sideways’
By Paul Price of Market Shadows
Would you take a bet that has a better than a 90% chance of winning? Would it make you feel better if you got to hold the stakes until the wager had played out? Those odds are available right now for put sellers on the shares of high-quality discount retailer, Kohl’s (KSS).
Most stores suffered in the first quarter of 2014 due to bitter cold associated with the Dec. 2013 – Apr. 2014 Polar Vortex. Many folks chose to simply stay at home rather than fight the elements. Less shoppers combioned with snow and ice removal costs negatively impacted earnings.
Fellow discounter Wal-Mart said weather-related expenses knocked three-cents a share from its fiscal Q1. Kohl’s chimed in with similar commentary when management announced earnings that were a couple of cents lighter than estimates. That hopefully non-recurring drain shouldn’t detract from either company’s long-term prospects.
[After the close on May 15, Berkshire Hathaway (BRK.a, BRK.b) announced it had boosted its already hefty stake in WMT during the March quarter].
Kohl’s garners high grades in three out of four of Value Line’s most important company metrics. It fell slightly below average in terms of ‘price growth persistence’, Value Line’s gauge of how well a stock performed long term versus their full 1700-company main research universe.
KSS has been in a fairly tight trading range during the past four years. The shares have gyrated around the $50 mark even as they went from paying no cash dividend to the present quarterly rate of $0.39. At Thursday’s closing quote of $52.21 KSS provides a well-covered current yield of 2.98%.
KSS increased its payout during each of the four years since cash distributions were initiated. In a ZIRP world, Kohl’s yield provides support in the same way that utility company dividends do. At a historically typical 2.5% yield KSS shares would trade closer to $62.
The light first quarter means Kohl’s may not achieve Value Line’s 2014 estimate. It is still expected to earn at least $4.05 – $4.15 per share. KSS’s average P/E, in the six years from 2008 through 2013, was 13x. A return to a normal multiple would support a $54 target price.
The beauty of put writing is that you don’t even need the underlying stock to go up in order to make money.
Selling KSS January 2016 $50 puts brought in $6.30 per share today (May 15) with KSS trading for $52.41.
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