BlogCast #3: Trading Range, Satellite Positions
25Apr23 $WBA $GPN
Summary
The market is in a broad trading range, affected by high borrowing costs which are reflected in company strategies and earnings. The plan is to phase out underperforming satellite positions and focus on core positions in the US and Canadian portfolios. Some companies with low valuations and debt are in the penalty box, and it's important to check whether companies are cash positive or have debt before buying. Earnings for certain companies are expected to continue to improve, leading to potential growth opportunities.
AUDIO Here’s a synthesized audio playback of the Purple Chips call between Raymond and John. You can adjust the audio speed.
Transcript:
Raymond
Okay, so, John, good morning. How are you doing today?
John Schwinghamer
Good. How are you Raymond?
Raymond
I'm pretty good. I was hoping that to start off you could tell me a bit about the state the market is in these days?
John Schwinghamer
Oh, I think it's been pretty much the same as in the last month, let's say, where we have a situation where I think rates are still going to remain high. They may slow the rate of raising rates, but I think the chances are that rates will still be on the high end of the range. And because of that, we're seeing a lot of companies that are adjusting their strategies to the higher cost of borrowing. And that's being reflected in earnings. So really, to summarize, my view is that the market is in a broad trading range. As I said, the last time we talked, the way to take advantage of this is that when you have stocks that have let's say risen 10 or 15%, you might want to peel a little bit off and keep your cash levels up, because I think there's going to be plenty of opportunities to buy great stocks at very good valuations.
Raymond
I wanted to switch focus this time around and talk a bit about the some of the stocks that haven't done so well in our holdings. In our satellite positions, there's a couple of questionable stocks that we have: Global Payments and Walgreens boots Alliance. What are your opinions on those?
John Schwinghamer
It's really easy to talk about the winners, but it's not so easy to talk about the losers. So I'm glad you're asking me that question. And I guess the other question that follows naturally is why didn't we sell these if they're such dogs?
Before going further, I wanted to mention that our plan is still to to phase out those satellite positions and just focus on our core positions in the US and Canadian portfolios. And as you know, the satellite positions haven't served us well. Walgreens and Global Payments are prime examples, but they are two very different companies.
So Walgreens, let's talk about that. Walgreens has a reasonable amount of debt. And that is one of the reasons that it's in the penalty box. But, when I look at the stock, where it's trading now around 35 and a half dollars, and in terms of a P E ratio, it's trading around eight and a half times the adjusted earnings. The earnings are pretty much at the lowest level that we've seen in the last maybe eight years or so. And consequently, the stock is at an even lower level than where it was eight years ago. In fact, the valuation is lower than we've seen in a long, long time. Now, I don't like this stock, but I do think it's worth more. I don't think it's worth $35. I think it's worth 50 or even $55 based on the current earnings trend. Now the earnings trend has been negative for the last six, seven quarters, but for the next quarter, which comes out June 28th, the analysts forecasts are calling for earnings of $1.10 compared to 96 cents a year ago. And you can see this trend, this quarterly improvement starting from this quarter on. That's going to make a big difference because every time they report a quarter now you're going to see that trailing 12 months earnings start to ratchet up and you're going to see earnings starting to go from, let's say, this year, they should run about four and a half dollars a share. They're going go to 4 80 then 5 26 a year later. So I think we've seen the worst in the stock, and I think it's going to get better, and I just don't want to sell it at 35. I'd rather see that 50 plus before I start considering selling it.
Raymond
We can see that Walgreens is also paying out a nice dividend.
John Schwinghamer
The dividend on Walgreens is $1.92 a share and I don't think there's any question, the dividends not at risk. The yield works out to about 5.4% at this price. It's not a bad dividend when you think about it, and so we're being paid to wait. And I think it's worth waiting until we see at least 50 Plus on this stock before we consider selling it.
So let's move on and talk about Global Payments. Global Payments is a pretty different situation in terms of how much I like this company. First thing to know about Global Payments: they also have debt. And note, this is a common theme here. A lot of companies that are in the penalty box have reasonable amounts of debt, and so it makes sense as interest rates have risen dramatically in the last year. So all of these companies are being put in the penalty box.
So the key is if you're going to focus buying good companies at attractive valuations, make sure you check if they are cash positive, or if they have debt. If they have debt, that's a checkmark against them.
Going back to Global Payments. The next quarterly earnings release is on May 1st, which is not far away. In the last quarter they outperformed: the quarter was 2 42 compared to 2 13. The next quarter coming up in a couple of weeks should be around $2.30 versus 2 07. And that trend is going to continue. So we're going to see the annualized earnings going from about $9.30, let's say to about 10 and a quarter to 11 79.
That kind of excites me because Global Payments has a terrific history. They've got very, very smooth earnings going back some 20 years, and the trend never, never changed much. It's a nice beautiful line. And the valuation however, is super cheap. It's only trading at 11.7 times earnings. That's pretty low. Now I think this stock, unlike Walgreens, I think this thing can easily get back $150 compared to the current price of about 110. In addition to that, I think eventually you're going to see it go higher than that because this is a great company. And the earnings should continue to progress very nicely. In terms of dividends, they pay about $1 a share, which works out to a 0.9% yield. It's not much of a yield. But this company, in my opinion is in the bargain bin right now. So I'm definitely not selling it at $110. I do plan to get out of it at some point. But I'm thinking with time it will get back to 150 and with a little more time, maybe it's going to get closer to 175 180. So there we are.
Raymond
Okay, we'll soon see if the analysts are correct and wait for some positive movement on both of those stocks.
John Schwinghamer
Thank you. We'll talk soon!