Cash. It’s your best friend. Momentum is still red.
The bulls have been tamed. And 638 stocks hit their 52-week low. It’s getting “real” out there, and the bottom is not forming. Apple stock has now dropped to $137. Its momentum has been absolutely brutal, dating back to April 4. Apple nearly touched $180 in late March. Ouch.
While everyone else is looking for the bottom, I’ve remained steadfast in my approach. I’m waiting for the Federal Reserve to flinch, waiting for insiders to buy their stocks on a massive level, or focusing on a simple strategy to start putting my cash to work. That’s why my “buy” today is a beaten-down retail stock.
Kohl’s Cash Bonanza
If you like clothing that falls apart within six months, you’ll love the summer line of Kohl’s (KSS). Unfortunately, the retail company’s stock has entered a free fall over the last week after the company’s board of directors rejected multiple takeover bids from private equity firms and jettisoned the efforts of an activist investor to change leadership.
The stock fell under $40 on Wednesday. However, it bounced a bit higher today. I’d suggest that the board of directors should face fiduciary lawsuits from their shareholders for failing to take a $64 or $65 bid from a company like Sycamore Partners.
However, shareholders recently voted the company’s board of directors to another term. Seriously. They allowed these people to keep their jobs. So, the shareholders should sue themselves for stupidity. Executives believe that the stock will be worth $80 or more by 2026.
In terms of the time value of money combined with recessionary concerns, give me $64 all day, every day, and walk away. Everyone is looking for a bottom on this stock. I know it. And you should be willing to buy the stock at that level.
What is Anything Worth Right Now?
We are engaged in a period of price discovery. While the Fed raises interest rates, valuations continue to compress across the board. Two weeks ago, 46 stocks with market capitalizations above $10 billion had price-to-sales ratios above 10x.
Today, there were 28. That’s the power of institutional selling and negative momentum. We are trying to figure out what any of these expensive stocks are worth.
In the case of Kohl’s, we want to know the worst-case scenario. What’s the stock worth if the company is liquidated… This company has inventory… land… buildings… and real assets worth real money.
The price-to-tangible book value of Kohl’s is 1.26x. That means the tangible book value of KSS… is $35.88. At that level, I want to sell the $35 put on KSS because it is less than the sum of its parts, and it trades at an attractive EV/EBIT of 7.4x.
Right now, the July 15, 2022 $35 put trades around $2.60. The $30 put for the same date trades at $1.44. If you sell that credit spread, you will receive a credit of $1.16 – or $116 for 100 shares of the stock.
Given that you are selling the $35 and protecting yourself with the $30 put, you would require $5 – or $500. The potential return on this trade is fantastic – 30.2% in two months.
The maximum annualized return is 190%. How can you not love that upside? But look at the downside. If the stock does tank, you’re going to have an obligation to buy 100 shares for each spread at $33.84 – roughly two dollars less than the company’s tangible book value.
That’s right. The worst scenario is that you buy a stock that you want to buy for less than the value of its assets.
Oh… and there is a bonus. Also keep in mind that it’s going to get bids from private equity firms in the next few weeks for takeovers. I think this is a great trade.
I get to buy something that I want for less than its worth if the stock tanks. If it gets bids, the spread expires worthless, and I get to pocket the credit. That’s how you trade value and price discovery in this market.