One advantage of this market volatility is that it is creating attractive opportunities for investors to accumulate shares of market leaders at discounted prices.
Back in September, I wrote about Montreal-based Gildan Activewear Inc., maker of socks, underwear, fleece and T-shirts, suggesting that investors accumulate shares, but below $39. Well, year-to-date, the stock price has fallen from $39.34 on Dec. 31, closing at $33.15 on Tuesday, a decline of 16 per cent. This is a buying opportunity for long-term investors.
The sell-off has been driven by a number of temporary headwinds facing the company. First off, the weather. It has been an unseasonably warm winter and this will weigh on Gildan's fourth-quarter earnings. At the beginning of February, competitor Hanesbrands, reported fourth-quarter earnings that fell short of expectations, citing the warmer weather with fewer shoppers as a cause for the disappointment. Hanesbrands' stock price plunged 15 per cent the following day.
Also, Gildan says it has "replenishment issues" at its largest client, Wal-Mart, with store pegs empty. This may take time to work through but nonetheless should be temporary. Third, management has been revising its full-year 2015 earnings-per-share guidance lower, and analysts have been trimming their earnings forecasts – putting pressure on the stock price. Furthermore, the retail environment is challenging and competitive. Finally, investors are skeptical about global economic growth, avoiding cyclical stocks, preferring defensive and high-dividend paying stocks.
However, looking beyond the next few quarters, the company has very attractive prospects that should lift the stock price higher. The company has a strong balance sheet with low debt levels, enabling it to fund future acquisitions, and potentially raise its dividend or buy back shares. In addition, cotton prices, an input cost, continue to decline. Earlier this month, the National Cotton Council of America provided its 2016 outlook, citing challenges from current "sluggish cotton demand, smaller imports by China, weakness in other commodity markets, and a stronger dollar."
Furthermore, the company continues to enter new sales channels. Last year, Gildan-branded socks and underwear began selling at a large U.S. retailer, presumed to be Target. As well, management expects to realize $100-million in annual savings by the end of 2017 from its newly constructed manufacturing facilities. Also positive, the company is paring off some of its lower margin private-label products as it focuses on growing its branded business.
Next Wednesday, Feb. 24, could be a volatile day for the stock as the company will be reporting fourth-quarter results. The consensus earnings-per-share estimate is 28 cents (U.S.). The stock price gained nearly 5 per cent on the day it reported its third-quarter results. Prior to that, in July, the stock price declined nearly 8 per cent the day the company reported its second-quarter results.
Dividend policy
This growth company pays shareholders a quarterly dividend of 6.5 cents (U.S.) a share, or 26 cents a year, equating to an annualized dividend yield of 1 per cent.
Valuation
Shares of Gildan are trading at a price-to-earnings multiple of 13 times the 2016 consensus earnings estimate, well below its historical three-year average P/E multiple of 18 times, and at low end of its historical trading range.
Analysts' recommendations
According to Bloomberg, looking at analysts' recommendations updated since November, 2015, there are 16 analysts with buy recommendations and three analysts with hold recommendations. The average one-year price target is $46.24 (Canadian), implying a potential price return of nearly 40 per cent.
The consensus earnings per share forecast is $1.46 (U.S.) in 2015, advancing 22 per cent to $1.78 in 2016. Earnings per share is forecast to reach $2.01 in 2017.
Chart watch
This stock chart is weak with the shares in a downtrend.
There is technical support around $33 (Canadian), and failing that, the next major support level is near $30.
There is technical resistance around $36, and then around $38, which is near its 50-day moving average. There is also major upside resistance at $40, close to the stock's 200-day moving average.
The bottom line
The stock's valuation is compelling. The recent weakness is a buying opportunity. Investors may want to consider accumulating shares with a staggered approach given the high volatility in the stock price.
I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
The author does not personally own shares in the security mentioned in this story.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.
