Acuity Shows Cost of Waiting on Analysts

I can't stress enough the value of investing "by the numbers" rather than waiting for the crowd to agree with you.

My recent piece, "How Wall Street Works," offers insight on this very important topic. 

Another example unfolded last week as shares of Acuity Brands Inc. (AYI) started showing some real strength. Acuity Brands was universally loved back in 2015, when it peaked at north of $280. Almost nobody loved it last May, though, when its shares fell to about $110.

What was the most amazing thing about all that? Acuity's fundamentals were much stronger this year than they were three years earlier. AYI shares are unusual in exhibiting high volatility despite posting excellent, and predictable, long-term growth.

That makes Acuity an ideal candidate for swing traders willing to buy low and sell high. I'm not speaking of day trading, but of playing cyclical popularity that typically unfolds over months, not hours or weeks.

Don't simply take my word on this. Acuity's numbers since 2010 have been remarkably excellent. Every major metric improved dramatically, including the most important earnings-per-share figure, which surged by about 340% over those eight years. Acuity's fiscal year ended on Aug. 31, 2018. The fiscal fourth-quarter and full-year numbers are due for release pre-market on Oct. 3.

Long-term shareholders should be happy with a 288% gain, plus some small dividends. They could have done much better, however, by cashing out a few years ago and repurchasing much lower.

How could they have known to do that? It would have been easy if they paid attention to the stock's valuation.

Since the start of 2010, Acuity carried an average price-to-earnings (P/E) multiple of 24.1x. Five of its six "best entry points" (green-starred below) reflected nice discounts to that typical multiple. All four of AYI's "should have sold" moments (red-starred) occurred when Acuity commanded higher-than-normal P/E ratios. At 2015's pinnacle the premium ran a full 50% above average.

Astute value investors could have noted AYI's relative cheapness back in the fall of 2011, and again in May of this year. Buyers at those obvious bargain price points were well-rewarded. This year's nadir represented the lowest P/E on Acuity since the dark days of early 2009.

Simply assuming a normalized multiple on fiscal 2019 EPS projections supported an end-of-2019 target price of $226. That goal was/is far from an upper limit. Note that AYI peaked between $241 and $281 during each of the calendar years 2015 through 2017. The company's EPS are substantially higher today.

However, I didn't see any analysts touting the stock last May near $110 to $120. It took a rebound to the $150 to $165 range before any became brave enough to start warming up to AYI again.

Avoiding the falling knife did nothing but keep them away from the easiest part of the gains. When the numbers were compelling, why watch a move of $40 to $60 per share while at "neutral" or "market perform" before upgrading?

Option sellers can play AYI's upside by selling some in-the-money puts out to February or May or next year. The graphic below shows the earlier expiration as the May series was due to start trading on Sept. 24, the Monday after when I was writing this article.

As of Sept. 21, with AYI at $165.06, the worst-case forced purchase price on the February $170 put dropped back to $154.80. That break-even level provided a margin of safety of $10.26 per share (6.2%) from the trade inception price.

Maximum profit on these, or any other option sales, is always keeping 100% of all premium received up front. Last week's closing quotes would have left potential $1,520 to $2,920 per 100-share contract gains on the table if AYI rallies to the designated strike prices by expiration date.

With upside to north of $200, it's not too late to get long AYI. It's just a shame the analyst community waited so long to become enthusiastic again.

Buy some AYI shares, sell some puts or consider doing both.

At the time of publication, Price was long AYI shares and short AYI options.