If You Don’t Buy Now… You Don’t Know Jack

I usually avoid writing about stocks that I covered in the not-too-distant past.

When something gains or falls precipitously in a short time frame, however, I will make an exception.

Jack in the Box JACK, one of my favorite stocks right now, falls into that category. I was a big buyer last October when JACK fell to near the $60 mark as the entire market tanked towards the end of that month.

Shares that fetched almost $100 last July appeared compelling almost 40% cheaper.

After JACK rallied to north of $86 this past January I felt great about my late October purchases. The company is on pace to show decent year-over-year profit growth in FY 2024, which ends on Sep. 29, 2024.

Further profit gains appear likely in FY 2025 and beyond.

Inexplicably, though, JACK once again sold off to near its fall-of-2023 nadir. That sharp decline had me buying even larger quantities of the stock on this “second chance” opportunity.

Over the previous nine years all major metrics have improved greatly. Earnings per share more than doubled while management retired about 46% of all shares outstanding while also raising annual dividends by 76%.

The table below shows that the “efficient market theory” cannot apply to JACK’s share price performance right now. Both JACK’s absolute and total return, including dividends, to shareholders are decidedly negative despite excellent value creation since 2015.

Past periods of similar underperformance have always led to outstanding rebounds in the stock price as documented below.

This is the fifth major selloff in JACK just since 2019. The previous declines averaged minus 44.7%, followed by average rebounds of +195.7%. Plunges and recoveries both took place over average holding periods of under seven months.

JACK peaked between $93 and $124 during each of the nine years stretching from 2015 through 2023. Only one of those years (the stimulus year 2021) saw EPS higher than right now.

There is every reason to believe that JACK can once again trade at $100 or higher in the reasonable future. Climbing back to that level would allow for gains of 63.3% plus dividends from last week’s closing quote of $61.25.

Long-time readers of my columns might remember that Tractor Supply TSCO was my largest single holding back in the fall of 2017.

TSCO sported a similar look to what JACK exhibits today. It fell from a 2016 peak of $97.30 to just below $50. That was despite record EPS in 2017, albeit at a slower-than-typical growth rate.

Shares that used to fetch premium multiples of more than 30x were briefly available at about half that valuation.

I recommended TSCO here on TheStreet Pro in 2017 with a very conservative target price of $81.88.

What did TSCO do after bottoming in 2017?

After numerous pops and drops along the way, TSCO finally peaked (so far) at $268.02 on March 28, 2024.

TSCO ultimately earned $3.33 per share in 2017. Its projected EPS for 2024 now stands at $11.25.

Note, too, that Tractor Supply gave investors another great chance to buy as recently as March 2020, when the Covid panic sent the shares down from $110.40 in the summer of 2019 to just $63.90. TSCO went on to earn $6.87 per share in 2020 putting that panic low at only 9.3x its forward EPS.

We are often given incredible buying opportunities due to quirky/scary market action. It takes major conviction in your own analysis to force yourself to buy when others are desperately selling.

Let us get back to JACK.

What is the stock worth?

Since 2015 JACK’s average P/E ran 19.5x, accompanied by about 1.61% in current yield. Assume only a partial reversion-towards-the-mean 17.5 multiple on Value Line’s FY 2024 estimate and the 10-month target price becomes north of $110.

Apply a more typical 19.5x valuation of JACK’s FY 2025 estimate and $136.50 appears reachable by the fall of next year.

Neither of those possibilities is far-fetched. JACK changed hands at $113 during both 2016 and 2017 when EPS were less than $4. It topped out at $124.54 in 2021 on trailing EPS remarkably like what is projected for 2025.

Yahoo Finance calls JACK undervalued while calling for a rebound to $87.56 by this time next spring.

I view that as ultra-conservative since it implies a final P/E of just 13.7x year-ahead EPS.

Independent research house Morningstar calls present-day, as opposed to year-ahead, fair value for JACK as $87.42. It labels the shares as a 4-star, out of five, BUY. Excepting the Covid-panic low, JACK has never been at a larger discount to fair value over the previous decade.

Every previous instance of similar discounts to F.V. led to very tradable rallies.

GuruFocus research calls JACK “significantly undervalued.” They call present-day fair value as $98.24, suggesting greater than 60%, plus dividends, upside from the present quote.

Quantitatively based FAST Graphs calls a normalized P/E for JACK as 17.47x. Its FY 2014 estimate sits at $6.37, a bit higher than Value Line’s. Its FY 2025 projected EPS is also a tad higher, at $7.18.

Applying a 17.4 multiple leads to an end of 2024 goal price of $110.84 and a potential move to about $125 by the end of 2025.

All the research services mentioned are using the same data as I am. Each of them projects major upside for JACK from today’s price.

Even the most conservative of the expectations would deliver very acceptable total returns. Options are available extending as far out as Dec. 20, 2024. Premiums on sales of both covered calls and naked puts are quite juicy due to JACK’s relatively high implied volatility (IV).

I would recommend buying shares now, along with sales of naked puts. Wait for a decent rally before selling any covered calls on JACK, and then use out-of-the-money strikes to allow for the kind of appreciation potential I have laid out today.

I cannot find any bad news of JACK to account for its recent plunge. In my world that means buying new positions or adding to older ones is now called for.

At the time of publication, Price was long JACK shares, short naked puts on JACK and short covered calls written at strikes of $90 to $100 when the shares were much higher than now. JACK is now among my his largest dollar holdings in his personal accounts. He has no current positions in TSCO.