Let Your 'Fear of Heights' Protect You
Courtesy of Paul Price
Fear of heights is often considered a psychological abnormality. In the investment world, however, it can be a downright lifesaver.
Stock valuations can get ahead of themselves, but they rarely stay inflated before falling back to earth. Mid-cap WD-40 Company (NASDAQ:WDFC) makes the ubiquitous oil-based spray products most of us have tucked away somewhere in our homes or garages.
The stock used to fly under the radar. It was mostly thought of as a conservative way to get about 2.5% to 3.5% in predictable annualized dividend payments. What kind of P/E does single-digit growth typically warrant?
The past nine years of market action says that since the end of 2006, WD-40 has averaged an 18.1x multiple, typically accompanied by about a 2.64% current yield. The best buying opportunities (green-starred below) often provided entry points even better than that.
Traders who overpaid for WD-40 near 2007’s peak, at an above-normal 23.3x multiple, absorbed about 49% drawdowns at 2009’s nadir. They didn’t see share price gains for more than four years.
Momentum buyers who joined the party in late 2013 experienced a greater than $14 per share, 11-month long retreat before WD-40 started heating up again.
Irrational people have now pushed WD-40 north of $115, a previously unthinkable valuation of 33.4x expected earnings. The 1.46% current yield, at 45% below normal, is pretty much the stock’s worst ever.
Analysts take a positive view on WD-40’s business prospects. Value line thinks the firm can post $4.70 in EPS no later than fiscal year 2021 (fiscal years end Aug. 31 of the same year). Even so, they see the stock’s multiple regressing back to a more pedestrian and historically correct 19.0x.
Under that scenario today’s shareholders would have no chance of making money even when taking the now-meager dividend into account.
