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  • Earnings growth makes this footwear stock a bargain.
  • It's too soon to buy this ad-related play.

The stock market has made a big move in the past month, so a pullback wouldn’t be surprising. If we backfill some recent gains, you might want to take advantage of down days to pick up some stocks on sale. However, figuring out what to buy can be tough. There are thousands of publicly traded stocks, so if you’re struggling to decide what to add to your watch list, you’re not alone. Don’t worry. We’ve got you covered. Here’s one stock you can start buying on sale now and another stock you’re better off keeping in the penalty box until there’s more conviction.

Famously cheap

You probably haven’t heard of Caleres Inc, but you have likely heard of its Famous Footwear stores. In addition to its retail stores, it owns a slate of footwear brands and sells its shoes through 13 owned e-commerce sites.

In Q4 2021, sales at Famous Footwear stores were 9% above the comparable fourth quarter of 2019, prior to COVID lockdowns and retail store closures. In addition, four of its footwear brands, Sam Edelman, Allen Edmonds, Vionic, and Blowfish, have surpassed pre-COVID sales levels. In 2021, the company’s revenue was $2.8 billion, up 31% from 2020.

The company made significant progress in improving its balance sheet in the past year. It's been shifting its debt to a lower interest revolver and as a result, it finished the quarter with $305 million on the revolver and no long-term debt, lowering its annual interest expense by about $20 million versus 2019.

In addition, the company continues to reward investors, buying back stock, and increasing its dividend. For instance, it bought back 2% of its shares outstanding -- 701,000 shares -- in Q1.

In May, Caleres reported first-quarter sales of $735 million, up 15% year over year. Its earnings per share totaled $1.32, up 120% from last year, prompting management to boost its full-year EPS outlook to between $4.20 to $4.40. As a result, analysts increased their earnings forecasts to $4.34 this year and $4.69 next year. For perspective, Caleres EPS totaled $2 in 2016.

In “Step Into Caleres Now, Walk Off Wealthier Later,Real Money Pro value-investor Paul Price explains why Caleres has become his single-largest position. He writes:

“In our high inflation world, it's great to find a stock that offers much more value today for pretty much its price from eight years ago… Footwear designer and retailer Caleres (CAL) ramped up sales, cash and earnings tremendously since the end of fiscal 2014... Total shares outstanding were trimmed by almost 14% as well… Amazingly, continuous shareholders have not benefited at all. Their loss is your gain if you are establishing positions today…This is the perfect setup for a huge "catch-up" move higher.”

Price bought Caleres during the COVID-era drubbing when shares collapsed to about $3. Today, shares are trading in the mid-$20s, so Price has been rewarded handsomely for his optimism. Despite his gains, he remains long. He writes, “I have not sold one CAL share since, but have added more. It remains my single largest dollar position in my personal accounts.”

The bear market has kept a lid on Caleres' share price this year, and as a result, Price believes it's undervalued.  He writes: 

“From fiscal 2014 through fiscal 2019, CAL was steadily profitable…The stock's average P/E over that stretch ran about 13.9-times...Assign a normalized multiple to this year's estimate and you come up with a 6-month target price north of $60. That is not far-fetched. Remember, CAL routinely hit $32 to $41 on EPS less than half of what is now in effect.”

If Price is right [pun intended], buying Caleres near $25 when its forward P/E ratio is below six could prove very profitable.

Too blurry to buy

In 2020, Roku benefited from a perfect storm. COVID forced consumers to increase their consumption of at-home entertainment, cheap credit and stimulus checks supported TV sales, and fiscal and monetary policy caused a sharp rebound in economic activity that fueled corporate advertising budgets.

As a result, Roku’s shares rose an astonishing 743% from its March ‘20 low through its peak last summer.

Unfortunately, the easy-money sugar high is wearing off. Inflation is outpacing wage growth, squeezing consumer wallets, and interest rates designed to curb inflation are starting to take a toll on margins, causing companies to retrench spending. As a result, worry over slowing growth has caused shares to lose 84% since last July.

Although Roku earned $1.71 per share last year, analysts expect it to lose $2.99 per share in 2022 and $2.36 per share in 2023. Therefore, despite the sell-off, Roku’s shares are arguably still expensive, particularly since GDP is declining and ad budgets remain at risk.

The technical picture is blurry, too. 

In “Roku Plunges After Results and May Not Have Found a Bottom Yet,” Real Money’s Bruce Kamich advises caution. He’s been interpreting charts professionally for over 40 years, and today he writes, “The charts and indicators of the streaming company are mixed, though the shares have yet to display a bottom reversal.”

Kamich considered Roku's daily and weekly charts, on-balance volume, and moving average convergence divergence. OBV is essentially a running total of up-day minus down-day volume. MACD is a momentum indicator that can signal character shifts by comparing moving averages of different time frames. He writes:

“In this weekly Japanese candlestick chart of ROKU, below, we can see a long red real body (bearish) in the latest entry on the chart. Lower shadows in May did not generate a bounce. The 40-week moving average line is pointed lower. The weekly OBV line has been in decline for a long time. The 12-week price momentum study shows a bullish divergence from January, but it has yet to generate a decent rebound.”

CHART

To determine price targets, Kamich uses point-and-figure charts. On the daily chart, Roku reached the downside target in the $60s; however, a weekly chart reveals a downside target “in the $40 area,” according to Kamich.

The takeaway? Despite the damage, there’s still too little conviction to buy shares.

Kamich concludes, “Overall, the charts and indicators of ROKU are mixed. The decline has been slowing for months but it has not produced a rebound. While Friday's selloff may have seen "throw in the towel" selling, we do not have a bottom reversal of any sort. Avoid the long side of ROKU.”

Smart Play

I’m constantly updating my watch list, and you should be too. The market moves in waves up and down, and investors who continuously search for stocks worthy of their hard-earned money profit from these waves.

Deciding what stocks to add to watch lists is tricky in a bear market. The temptation is to focus on stocks that have fallen most, hoping for a bounceback. However, historically, the next big winners aren’t past big winners. Of course, there are exceptions, but it can take years for former high flyers to regain lost ground. For example, there are dozens of Lucent-like stories for every Amazon that delivered impressive gains after the Internet Bust.

In the short-term, beaten-up stocks can enjoy impressive short squeezes, but they also have truckloads of sellers trapped overhead who are eager to sell rallies. For this reason, stocks trading above rather than below key long-term moving averages, such as the 200-DMA, can be a better bet exiting a bear market.

Unlike Roku, Caleres is trading above its 200-DMA, its earnings are growing, and it's trading below its average historical P/E ratio. It also pays a 1.1% dividend, and institutional investors are increasingly including it in their portfolios. As of June, 389 funds own Caleres, up from 319 one year ago. Conversely, the number of funds owning Roku has slumped to 1,105 from 1,372 in the past year.

For these reasons, consider buying Caleres on down days and take a 'wait-and-see" approach to Roku. If you’re a long-term investor, you can buy-and-hold Caleres like Price, or if you’re an active investor, consider limiting your losses by placing a stop below its recent July low of $23. 

  • Earnings growth makes this footwear stock a bargain.
  • It's too soon to buy this ad-related play.

The stock market has made a big move in the past month, so a pullback wouldn’t be surprising. If we backfill some recent gains, you might want to take advantage of down days to pick up some stocks on sale. However, figuring out what to buy can be tough. There are thousands of publicly traded stocks, so if you’re struggling to decide what to add to your watch list, you’re not alone. Don’t worry. We’ve got you covered. Here’s one stock you can start buying on sale now and another stock you’re better off keeping in the penalty box until there’s more conviction.

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