There are dozens of different trading strategies that one can employ, but the key is knowing which are best suited for the current environment.
In a cyclical bear market, like we’ve found ourselves in, some investors might assume that trend-following strategies are inferior, providing lagging signals in a volatile market environment. However, this assumption couldn’t be further from the truth.
In fact, one of the best strategies in a volatile and downtrend environment is searching out those stocks making new 52-week highs, and all-time highs as the S&P-500 plumbs new 52-week lows.
The reason is that if a stock can advance in the face of such extreme downward pressure, it’s like under accumulation, either due to being an acquisition target or due to large funds seeing something that others might have missed.
One name currently fits this bill, and even more impressively, it’s working on a 14-year base breakout.
A Steady Earnings Grower At A Reasonable Price
Grief, Inc. (GEF) is a $3.3 billion global supplier of industrial packaging products and services with strategic locations in over 37 countries.
The company’s packaging solutions include adhesives, steel drums, containerboard, tubes, corrugated bulk boxes, and water bottles, and it provides collection, recycling, and reconditioning services.
While this might seem like an extremely boring company, boring is sometimes good, and this “boring” business has enjoyed a compound annual EPS growth rate of 16.9% since 2015.
Unlike many S&P-500 companies seeing margin compression in the current environment, Grief has been immune from these issues, taking prices in its paper & packaging business and maintaining a solid backlog despite the weaker economic environment.
This was evidenced by an adjusted EBITDA margin of 17.0% in fiscal Q2 2022, a 430 basis point improvement from fiscal Q2 2021 levels.
Meanwhile, in its global industrial packaging segment, the company held the line on margins (13.5% vs. 13.3%), helped by strong volume in resin-based products and despite the slowdown in the APAC region due to another string of lockdowns.
This ability to grow margins on balance makes Grief Brothers a very interesting mid-cap story, especially given that sales are also booming, up 24% in fiscal Q2 2022 (quarterly EPS was up 113% to $2.41 vs. $1.13) despite flat SG&A.
The result is that Grief is set up to see an acceleration in annual EPS growth while many industries are seeing limited earnings growth or year-over-year declines as the benefit of sales leverage wears off and material/wage/fuel inflation pinches margins.
Just as importantly, it’s investing heavily in AI and technology to provide industry-best customer service, which should help it maintain and even build on its recent market share gains.
The Fundamental Case
From a valuation standpoint, Grief could not be more attractively valued, trading at just 8.9x FY2023 earnings estimates ($7.70), well below that of its peers like Ball Corporation (16x earnings), Avery Dennison (18x earnings), and Packaging Corporation of America (12x earnings).
Even assuming a lower 14% annual EPS growth rate than historical levels translates to a very PEG ratio of 0.64 for GEF.
If we measure GEF’s current earnings multiple vs. historical levels, the stock looks insanely cheap by this metric as well, trading at a 41% discount to its 10-year average PE ratio of 15.1.
So, on both a relative value basis and a historical basis, GEF is an opportunity that Mr. Market looks to be pricing extremely inefficiently.
The Technical Picture
While GEF’s accelerating earnings growth rate (19.7% CAGR based on FY2023 estimates vs. 2015) and cheap valuation already make it attractive; it’s the technical picture that really makes GEF stand out.
This is because the stock is above all its key moving averages and recently broke out to new all-time highs from a 14-year base, one of the most significant base breakouts among any stock on the US Market.
As the saying goes, “the bigger the base, the higher the space,” and GEF’s recent breakout targets a move to $95.00 at a bare minimum following this breakout.
However, for investors that missed the initial breakout, the recent market pullback has left GEF back-testing its breakout area on low volume, providing an even lower-risk entry.
This makes the current setup one of the most attractive among any mid-cap names currently.
The Bottom Line
Based on GEF’s FY2023 annual EPS estimates of $7.70 and a conservative forward earnings multiple of 13, I see a fair value for the stock of $100.10, representing a 45% upside from current levels.
However, with the stock moving to new all-time highs, this often signals that earnings estimates are too low and the stock is set up for a beat, suggesting fair value could be revised higher if the company beats FY2023 annual EPS estimates.
Finally, the company has plans to increase its dividend and a $150MM buyback program, making GEF a mix of growth and value.
To summarize, with a 45% upside to my base case 18-month price target and a 2.7% dividend yield that looks set to grow, I see GEF as a Buy at $69.00.
The above analysis of Grief, Inc. (GEF) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
Is Grief, Inc. (GEF) A Buy or Sell?
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