Let Me Show You Why You Should Never Be Scared to Buy Bargains

I often get calls from subscribers who feel nervous about holding, or buying more shares, of stocks after they've taken huge drops.

Analysts feel obligated to downgrade stocks like those, as it's embarrassing to have buy-rated shares that look horrible. Investors, though, only have to please themselves.

Here is what happened with 10 of my retail company selections from their Covid-panic bottoms to their subsequent peaks. Almost nobody else was recommending these in the spring of 2020, as many stores had been ordered closed. Operating losses were the order of the day, as none was designated as an "essential" business.

Arts and Crafts retailer Michaels (formerly MIK) is not on that list. It went from a $1 bottom to a cash buyout at $22, a 2,100% gain for those who bought the nadir.

Even blue-chip stalwarts like PVH (PVH) (the old Phillips Van Heusen), Tapestry (TPR)  (formerly Coach) and Ulta Beauty (ULTA)  were hit hard. Smaller-company shares like the other seven shown below plunged even further as the "flight to safety" was in full force.

Not coincidentally, those three high-quality names rebounded less violently than the lesser-quality names.

I no longer own Capri Holdings  (CPRI) , Genesco  (GCO) , PVH, Tapestry (TPR) or ULTA, as they more than delivered what I had been looking for. Caleres (CAL) and Children's Place (PLCE) are currently my Top 2 largest dollar holdings.

The key takeaway was that brave souls who flaunted analysts' bearish recommendation made out like bandits. That is when other people were more than willing to part with perfectly good shares at unusually great forward valuations.

What looks today like those other companies did back in March of 2020?

Answer: Qurate Retail (QRTEA) , owner of QVC, HSN and Zulily. The-shop-from-home retailer actually benefited from the Covid-crisis. The year 2020 saw all-time record earnings per share of $2.46. The company made more in the fourth quarter of 2020 than in any previous calendar year.

Year 2021 was in line to show over $2 in EPS before a distribution center fire in North Carolina caused disruption and added expenses during the final months that year. Even so, 2021 profits came in at $1.72, the second best year in QRTEA's history.

Qurate's earnings predictability is not high. In their last full-page report (published Jan. 2022) Value Line was looking for $1.90 in 2022 for QRTEA. As of Tuesday, Yahoo Finance was quoting $1.43 as its best guess.

Even the lower of those two projections put QRTEA, now fetching $5.07, at less than 3.6-times forward earnings. The earnings yield on that multiple suggests a greater than 28.1% after-tax return on the stock's present-day market capitalization.

Owner earnings of that magnitude are equivalent to holding a bank CD with around a 45.5% interest rate.

Qurate's long-term pre-Covid average P/E ran about 22.2-times. Assume just a 12 multiple on EPS of $1.43 and you come up with a year-ahead goal price of $17.16. Hitting that very achievable number would deliver a 238% gain from here.

Research from Simply Wall Street called Qurate's present day fair value similarly, at $18.20 per share.

Those numbers appear achievable. Glance up at the chart presented earlier and you'll see that QRTEA traded around $21 - $31 during parts of each of the eight calendar years stretching from 2012 through 2019.

Only one of those years (2018) showed EPS as high as what is now probable in 2022.

Qurate's free cash flow is high and yet capital spending is not. That allowed for multiple special dividends totaling $5.75 per share since August of 2020.

If that pattern continues, or a regular quarterly payment is established, it's hard to imagine not being well-rewarded by owning QRTEA near the $5 mark.

Buying shares outright offers huge upside potential with the chance to collect future dividends as well.

Option-minded traders might also wish to short naked puts out to either January 2023 or January 2024 expiration dates. The graphic below detailed actual bid-ask spreads and the last trades (from Monday) with QRTEA at its 4 p.m. close of $5.20.

After making this graphic, I was able to pocket $2.50 per share on Wednesday for selling the Jan. 19, 2024 $6.75 strike price puts. That gave me a worst-case, forced purchase price of $4.25.

Future stock market action can never be guaranteed. That said, owning QRTEA at $4.25 would have been a winning position 100% of the time dating back to at least October of 2020.

The numbers on a January 2024 $6.75 strike price buy/write combination allowed for a best-case scenario, cash-on-cash return of 350% if executed in a margin account with adequate free buying power to secure the puts.

Break-even on that same combination dropped to $4.13 per share, offering an 18.5% margin of safety versus the $5.07 trade inception price.

Media mogul John Malone holds over 41% of the voting power in Qurate. Other insiders control more than 6%. They can't be happy seeing their own shares languishing like this. QRTEA changed hands at $14.62 as recently as last May. That preceded the most recent special dividend of $1.25 per share which was paid in December of 2021.

It would not surprise me to see a "going private" offer hit the table at about $10 per share while the stock remains ridiculously cheap. That would be stealing the company on a long-term valuation basis, but probably would be welcomed by people would bought over the past few weeks.

If allowed to continue trading, I see the potential for QRTEA to reach $15 to $25 again within 12 to 24 months. Stay tuned. Perhaps QVC or HSN will do an infomercial on their own shares.

At the time of publication, Price was long a large-sized position in QRTEA shares, short QRTEA options.