Value is what stock investing (and trading) is about. Whether you are looking at a long term value based on sound fundamentals and low multiples or at a short term overreaction to bad news causing a price to be too low, you are always looking for value.
Whenever I think about this, I think back to my days in the foreign exchange market. One of my fellow brokers was the son of a bookmaker and seasoned gambler. Whenever anybody talked about a trade (or a bet) representing value, he could be heard muttering "You can't eat value." In the world of horse racing where he grew up, this was simple fact; the odds on a horse only mattered if it won.
Most of us are tempted when we look at a stock that has fallen significantly in a short time, believing that at some point it will represent value, but that isn't always the case. Both Target (TGT) and Sodastream (SODA) had a rough second half of 2013 but in one case the lower price could well represent value, where in the other it would seem to be a forewarning of things to come.
Target was already suffering when news broke of the data breach that they suffered last month. Same store sales had been disappointing and forward estimates were cut as the year progressed, causing a drop of nearly 14% from the July 24th high of 73.50 to close the year at 63.27. Since the company revealed that customer records were hacked TGT has come under renewed pressure and closed at 62.62 on Friday.
What strikes me here is that, even as the events of the second half of last year unfolded, TGT kept beating expectations on the bottom line. A look at the earnings surprise history shows that they consistently earned more than consensus estimates. This suggests a well run company that can profit in tough times. To me, that is one of the definitions of value.
That value has only been enhanced by the recent drop. Obviously, there will be some erosion of trust initially following the theft of data, but the news that Neiman Marcus were also hacked indicates that Target is not the problem, and, in the words of the wise man "This too shall pass." I don't expect to see stellar earnings when TGT reports at the end of next month, but estimates have been revised in a downward direction everywhere so even a fairly weak number will likely have little effect on the stock price. At these levels and with a 2.75% dividend yield, TGT looks like value to me.
Sodastream, on the other hand, looks like a value trap, even after a drop of over 20% this morning, following lower guidance. That lowering of expectations is one of those things that makes you want to slap your forehead and shout "Duh!" The problem here is that the company is fundamentally a one trick pony. The concept of carbonating one's own drinks is hardly new; the device dates back to 1903, and, as with all gadgets, sales growth is finite.
Sodastream has gained attention and sales with a focus on healthy drinks and the reduced environmental impact of reusable containers, both laudable things, but the very trendiness of the thing troubles me. Cabbage patch dolls and, more aptly, the George Foreman grill were both trendy, but neither were able to achieve sustained sales growth.
I am old enough to remember the last wave of popularity for Sodastream, in England in the 1970's. My parents bought one and the fascination of using it lasted only a month or so for us kids. After that, the sleek looking device was concealed behind rows of conventional soda bottles in the drinks cabinet. It would seem from the latest guidance that history is repeating itself.
In general, when a stock price falls, it is for a reason. Sometimes, that reason is something that will heal with time and the low price represents value, as I believe is the case with Target. At other times, however, as with SODA, the big drop is based on the fact that a cycle of popularity is coming to an end. In that case, remember the wise words of an old gambler ... "You can't eat value!"