A Contrarian Play for Value Minded Investors

Woman Looking in a Department Store

While inflation concerns and a renewed fear of a COVID resurgence have rattled markets and increased volatility, it also provides an opportunity for those who know how to take advantage of it.

When cyclical market sectors become ignored amidst an uncertain climate, it means getting discounted prices in good companies.

Traders should keep their eyes on one retail chain posting impressive earnings per share (EPS) data, but it is still flying under the radar. This stock could be the key to outsized portfolio returns.

A Brand-Name Retailer and Undervalued Stock Play

Kohl’s Corporation (KSS) is a $7.8 billion retailer and the largest department store chain in the United States with more than 1,150 locations. The company has stores in every U.S. state except Hawaii.

The company reported a spectacular first-quarter earnings beat of $1.05 per share compared to the analysts’ estimates of just $0.04 per share. Net sales soared 69.5%, driven by a 14% increase in digital sales and double-digit growth in brick-and-mortar storefront sales.

One of the biggest catalysts working for Kohl’s is the market’s lack of appreciation for the company’s impressive online sales initiatives. The pandemic impacted retailers hard, with Kohl’s stock falling as much as 75% during the outbreak’s peak. However, it also revealed a silver lining – online sales. E-commerce sales skyrocketed in 2020, up 44% year-over-year — the most annual growth seen in the industry over the past 20 years.

The deal with Amazon allowing customers to return Amazon orders at any Kohl’s store location should provide the company with an additional dependable revenue stream as well.

There hasn’t been much analyst coverage on the stock lately, with the most recent being a reiteration by Telsey Advisory Group back in February of “market perform”. In addition, Telsey slightly bumped up the price target from $54 per share to $60 per share.

The Fundamental Side

The stock trades relatively cheaply at just 27 times earnings compared to the apparel retailers industry average of 46 times earnings. The high sales number for the stock gives it a price-to-sales ratio of just 0.45 – a good sign that the stock is trading at a discounted price.

KSS also comes with a surprisingly strong 2.0% dividend yield, giving investors an additional boost to their returns while helping to mitigate downside risks.

The Technical Side

Looking at the chart for Kohl’s may give investors pause considering the lack of strong bullish signals. The 20-day SMA is trending beneath the 50-day SMA right now, but it is still trading above the 200-day SMA.

The candlesticks show a couple of hammer patterns that formed over the past month, followed by a temporary rise in the stock price before falling again as well.

The lack of bullish or bearish signals also shows in the flat RSI of around 46 and the steady daily trading volumes.

The Bottom Line

Based on Kohl’s full-year EPS estimates, this stock should be fairly valued at around $60 per share. A move to this price would represent a gain of more than 20% from its current trading price.

Investors who like going against the common rationale and finding winning stocks in places no one else thinks to look should find Kohl’s an irresistible, attractive opportunity.

The above analysis of Kohl’s Corporation (KSS) was provided by financial writer Daniel Cross.

Complete Technical Outlook for KSS

What’s the long-term outlook for Kohl’s Corporation (KSS)? Will the stock follow its overarching trend or make a quick reversal?

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