by John Jagerson and Wade Hansen | February 5, 2014 9:36 am
During the past couple of weeks, we have experienced substantial volatility in the markets, which has scared many investors, and is unfortunately something we have been become too well acquainted with recently. The pattern of unsatisfactory reports coming from the earnings calendar is continuing, introducing worries about the economy’s potential to rebound as the Fed tries to take a step back. U.S. stocks have been on a collision course, the Dow saw its most horrible selloff in several months with its seventh triple-digit drop on Monday.
The Standard & Poor’s 500 Index is dealing with its toughest January since 2010, and earnings stories at companies from Mattel (MAT), Exxon (XOM) and Amazon (AMZN) continue to frustrate investors. Amazon declined almost 9% after it documented profit and sales that trailed analysts’ estimates. Mattel sank 9.5% after a decrease in Barbie sales. Exxon Mobil claimed a 1.8% decrease in upstream volumes. Wal-Mart Stores (WMT) fluctuated after releasing data indicating that profit will be at or under the low end of its earlier predictions as winter storms, and lower food-stamp benefits damaged U.S. sales.
Markets (including emerging markets) have turned out to be much more unpredictable during the past 20 years due to an outflow of money from institutional investors, mutual funds, hedge funds and high-frequency trading. For short term traders, sell-offs can be stressful. However, we have been here before over the last five years and – until we see evidence to the contrary – the primary bullish trend is still intact.
Using the flow of the earnings calendar and buying on the dips is a risk, but there are some good values in the market right now. We have been trying to target firms with strong fundamentals that have already pulled back to long-term support levels – for example, Tupperware Brands Corp. (TUP). It has a strong business model, an extensive global footprint and is expanding on a smart business strategy which has been generating record earnings and growth.
The stock pulled back to long-term support recently after missing earnings expectations on Jan. 29. The earnings report (and a reduced outlook) was unfortunately released on a day that the rest of the market was selling off quite dramatically on concerns about emerging markets. However, the selling may present some interesting buying opportunities as investors seem to have overreacted to recent bad news.\
Get our recommended trade for TUP.
Tupperware Brands provides design-centric preparation and storage offerings as well as serving solutions for the home and kitchen. The company also offers beauty and personal care products. It primarily distributes products through individuals and independent sales organizations in a network marketing model. This is both the source of its growth as well as its sensitivity to the current market disruption.
Companies with network marketing models are growing by expanding outside North America and Western Europe into emerging markets. The products are mostly purchased by “independent distributors” and their networks of friends and relatives, which is an effective model in developing economies. NuSkin (NUS), Herbalife (HLF) and Avon (AVP) have similar market models for their products. However, because of the focus on emerging markets, most of these firms took a big hit during the selling this week. If the BRICs start to slow down network marketing could slow down as well.
We feel strongly that the current selling in emerging markets has been overblown like it was in 2010, 2011 and 2012. In each of those years, TUP experienced a similar sell-off only to rocket back up to new highs. The potential for a similar rally in 2014 is attractive enough to be worth the risk for a new entry at this point. However, we would recommend new buyers put a stop loss on TUP below support at $75 per share.
Tupperware Brands had a solid 2013. The company’s stock has gained momentum over the year and had reached record highs of around $98/share by the end of 2013. However, concerns that 2013’s growth wouldn’t be repeated in 2014 has sent the stock down 17%.
At the moment, the stock is trading in the range of 13 times-to-earnings and 1.6 times-to-book value, while the industry average is 21 times-to-earnings and 2.2 times-to-book value. Tupperware Brands looks undervalued and the average analyst expectation of $100/share seems conservative.
The company has had a meaningful sequential increase in total distributors over the quarter, closing the year with 2.9 million globally, a 4% increase over the past year. Even in these challenging environmental conditions, the company has been able to generate solid growth in emerging markets, up 12% over the last year.
In addition to growth, we think investors will favor TUP over its peers because of its strong cash flows, which have allowed the company to distribute dividends and carryout an aggressive buy-back program. TUP announced plans to buy back $185 million worth of shares in 2014. This repurchase will likely impact the share price and produce higher value in the coming months.
Surprises in the earnings calendar and the mess in emerging markets may not be over; however, recent history has shown these selling-frenzies to be short-lived. We think this is a good time to speculate on a firm that could come roaring back and investors get back into a ‘risk on’ mood. We are favoring TUP because it’s at a strong technical support level and its fundamentals are best-in-class.
A tight stop that trails the stock as it moves back towards $100 per share is appropriate. Options investors may even consider a long call position with a July expiration as an alternative.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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