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Blockbuster Deal Creates Buying Opportunity

By Peter Staas, on Dec. 23, 2017

With the long-running bull market showing no signs of tiring and the S&P 500 shrugging off any potential worries, momentum rules the day and value-seeking investors must dig deep to uncover legitimate opportunities.

In this environment, some might be inclined to close their eyes, plug their noses, and wander out on a limb to find a bargain. Unfortunately, many stocks are cheap for a reason; valuation alone doesn’t make an investment thesis.

But value investors shouldn’t abandon all hope in the latter stages of a bull market. Elevated valuations raise the bar of expectations, increasing the risk of disappointment—and traders sitting on big profits in a stock are more likely to sell first and ask questions later.

A Remembrance of Picks Past

This year, we’ve found value among niche retailers, as any hint that Amazon.com (NSDQ: AMZN) could disrupt a particular market is enough to take stocks down a peg, regardless of their underlying fundamentals.

Former Wealth Builders Portfolio holding Kroger (NYSE: KR) learned this lesson the hard way, with the stock suffered a double-whammy after the company lowered its guidance and Amazon.com announced a blockbuster deal to acquire Whole Foods Market, intensifying an already ultra-competitive environment. The stock has clawed its way back over the intervening months, but we opted to exit our position for a slight loss because of concerns about the company’s strategic direction.

Earlier this year, we highlighted Ollie’s Bargain Outlet (NSDQ: OLLI) as a retailer that could continue to thrive in the age of Amazon. The discounter offers a compelling in-store shopping experience, keeps costs under control and can grow rapidly over the next several years by opening additional locations.

Since we profiled the company in the Jan. 19 issue of Capitalist Times Premium, the stock has returned 69 percent, trouncing the 20 percent gain posted by the S&P 500 Consumer Discretionary Index. Investors may want to take a partial profit off the table, but we see more upside for the company.

The sales productivity of Ollie’s Bargain Outlet’s new stores has gained momentum in recent quarters, which bodes well for management’s plan to grow the location count by the mid-teens in 2018. All signs point to another year of 20 percent growth in net income—and that doesn’t even factor in the benefit of stock buybacks or the lower corporate tax rate. Ollie’s Bargain Outlet rates a buy up to $55.

This summer, we highlighted Wesco International (NYSE: WCC) as a potential value play, taking advantage of a temporary swoon in the stock amid concerns about potential competition from Amazon Business—an overblown risk for an industrial distributor that generates 65 to 75 percent of its annual revenue from business tied to services and technical solutions.

The company also generates ample free cash flow and has a long history of unlocking value via acquisitions. We also thought that the market overlooked the progress that Wesco International has made in improving its profit margins, as well as the revenue upside associated with stepped-up spending by electric utilities and the construction of data centers.

Wesco International has returned almost 15 percent since the July 14 issue of Capitalist Times Premium, outperforming the 10 percent gain posted by the S&P 500. At these levels, the stock rates a Hold; we’d wait for another pullback below $60 before adding to or establishing a position.

Another Value Play

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