Is Kohl’s A Buy?

By Greg Sushinsky | January 29, 2010 AAA

Even before the recent market sell-off, some interesting buying opportunities looked to be shaping up. For investors who buy on fundamentals, and even many who don't, a stock's selling price is a large part of the equation. Whatever time horizon you may have, your purchase price will decide your ultimate profit or loss. We'll look at an intriguing opportunity in the form of Kohl's (NYSE:KSS) department store.

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A Recent History Of The Stock
A one-year chart shows that Kohl's stock surged from $32.50 a share in March of 2009, to $60.89 in October. Since then, the stock has drifted down to its current level of around $50 a share. Its five year high was in the high $70s.

The Fundamental Difference
Much of this run up coincided with a general market run up that other department store stocks such as JC Penney (NYSE:JCP) shared in. However, in Kohl's case, the drop in its stock price is traveling in the opposite direction of the company's fundamentals. JC Penney has more lackluster prospects for the coming year than Kohl's, as does Macy's (NYSE: M).

Kohl's has recently raised guidance on the basis of its same store sales in December. Kohl's also has strong earnings estimates going forward into the next couple of years, with 8% and 15% bottom line growth according to analyst figures. If you look at yet another competitor, Sears Holdings (NASDAQ:SHLD), it is evident that these other companies do not have earnings prospects in the same league with Kohl's.

The large discount star, Big Lots (NYSE:BIG), on the other hand, had recent strong sales and an upgrade. Its stock was pushed up accordingly. Fundamentals such as earnings may be disconnected from stock prices for a time, as this year's market run up shows, but eventually they tend to move more in concert. This fundamental relationship is important to keep in mind, especially for long-term value and growth investors. This is where patience and watching for a good buying price comes in.

The Many Ways Of Investing And Trading
Before you consider buying Kohl's or any stock, know the exact premise for your decision. Concepts like value, growth, and intrinsic value are open to debate. Likewise, investing styles are far from absolute. In their classic book, "Dividends Don't Lie," Weiss and Lowe developed a method of fundamental investing that bought and sold stocks on overvalued and undervalued points as indicated by their dividend yields. John Templeton bought bargains and sold them in a few years. And don't think that Peter Lynch and Warren Buffett never traded using their own versions of fundamental analysis - Lynch used to turn his portfolio over 300 per cent per year. Statements like, "buy and hold forever," or "trading is the only way to go," do investors a disservice. (Learn the basic tenets that helped Peter Lynch in Pick Stocks Like Peter Lynch.)

The Bottom Line
Whether you describe yourself as an investor, trader, speculator or some combination of all these things, it helps to know the one common theme of all these methods - they seek to make money by selling something for more than you paid for it. There can be some merging of methods in the case of Kohl's stock, depending on ultimate time frames, providing reasons to buy or not buy the stock. Obviously, technical analysts or momentum players would leave the declining stock alone. Other traders and investors may wait until the stock price goes lower and then buy the stock at a discount to the company's underlying fundamentals. That's every investor's individual decision. With the stock well off its one-year high and even farther from its five-year high, it is looking increasingly attractive. (To learn how investors reduce risk and increase returns through diversification, check out Modern Portfolio Theory: Why It's Still Hip.)

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