Specialty electronics and furniture retailer Conn’s (NASDAQ: CONN)
stock has been hit hard during the COVID-19 pandemic. With a customer base of lower credit score consumers, investors have been concerned with rising customer credit delinquencies and defaults. Shares have been on a slow grinding sell-off since peaking at $27.57 in September 2019 only to accelerate to lows of $2.83 on March 18, 2020, when the S&P 500 (NYSEARCA: SPY)
finally bottomed off a (-34%) descent off its highs. While problems continue to plague Conn’s, the market may have overdone its sell-off thus presenting a value buying opportunity for prudent investors and nimble traders. There is a technical pattern forming on the daily called a seed wave, which presents three potential upside targets upon triggering.
Q4 FY2020 Earnings Results
On April 9th, Conn’s reported their Q4 fiscal 2020 earnings report for the period ended Jan. 31, 2020. Topline revenues fell (-4.6%) to $413 million and bottom-line EPS missed by (-$0.15) at $0.20 versus $0.35 consensus analyst estimates. Results were “disappointing” as management revealed declining credit trends and difficulties in collection efforts under the new loan management system. This resulted in an increase in first payment defaults, 60-plus day delinquencies, and re-aged balances in turn resulting in higher charge-offs. Credit spreads declined to 790 basis points (bps) versus 890 bps year-over-year (YoY). Credit segment loss was (-$28.6 million pre-tax) compared to (-$16.2 million pre-tax) YoY. The credit statement loss primarily was due to the $13.9 million YoY increase in bad debt provisions.
However, the company believes those issues are in the rearview mirror with the resignation of John Davis, president of Credit and Collections in March 2020. They initiated tighter underwriting standards which did impact same-store sales by 3% to 4% in Q4. Residual impacts from Hurricane Harvey still plagued Q4. Strong sales in appliances and e-commerce were able to improve margins to 40% despite lower sales.
Pandemic Defensive Measures
While most stores remain operational with reduced hours through the COVID-19 crisis as of April 14, 2020, the company increased frontline employee wages by $2-per hour, which reducing certain executives and officer salaries by (-20% to -25%). Starting in March, the company implemented underwriting changes to remove high risk applicants while implementing payment relief programs for customers facing COVID-19 hardships. Conn’s plans to open 6 to 8 showrooms down from 16 to 18 showrooms this year. The stay-at-home mandates have bolstered sales of essential home appliances and home office products partially offsetting weaker demand for furniture. The company beefed up its cash position in mid-March by borrowing $275 million from its revolver. As of April 14, the company has approximately $400 million of liquidity ($270 million in cash and $120 million remaining revolver).
Ahead of the Restart Narrative Curve
Conn’s CFO, George Bchara made interesting remarks pointing out that their stores remain “profitable” despite significantly lower revenues. On average, stores fall to “breakeven” when retail revenues drop nearly 60% from YoY levels. On April 21st, Director Douglas Martin purchased $59,000 worth of CONN shares. Shares are trading at a price-earnings (P/E) ratio of 2.32 compared to a 11.35 P/E YoY. The company is still profitable and operating most of its stores which gives this one a nice lead on the restart narrative ahead of competitor Best Buy (NYSE: BBY), whose stores still remain temporarily closed limited to curbside pickups. BBY shares have rallied well off their lows leaving CONN shares as a laggard.
Opportunistic Buy Levels
Using the rifle charts on wider time frames to lay out the playing field is suitable for swing traders and investors. CONN is not a pretty chart but attempting to recover with a weekly stochastic cross up mini pup that needs to breakout through the 20-band. The daily formed a market structure low (MSL) trigger above $4.34. The weekly MSL triggers above $5.64, which can also trigger a potential daily seed wave pattern that forms when two sequentially higher MSLs form. This sets up three potential price reversal zone (PRZ) targets at $6.39 (1.27 fib extension), $6.79 (1.414) and $7.26 (1.618 final fib and monthly 5-pd moving average). It is worth noting that if CONN reaches the 1.618 PRZ, investors should consider taking profits since the monthly stochastic is in a bearish mini inverse pup. Meanwhile, the opportunistic entry levels sit at $4.23 Fibonacci (fib) level , $3.90 fib and $3.15 daily lower Bollinger Bands and fib. Nimble traders can scalp these levels initially for reversion and then with intraday trend. Swing traders can scale for overnight to multi-day holds. Long-term investors may consider a dollar-cost averaging approach with income generation through writing covered calls.
7 Stocks That Risk-Averse Investors Can Buy Now
If the title of this presentation piqued your interest, then you understand that there’s no such thing as risk-free investing. And that’s particularly true when you’re investing in stocks. The truth is sometimes the best thing that can happen is that your portfolio performs less badly than the market.
The goal of the risk-averse investor is not to avoid stocks, it’s to ensure that you retain the capital you gain, even if that means your portfolio does not grow as fast or as far as more aggressive stocks. You have to have a very low FOMO (fear of missing out) level.
With that in mind, there are still ways you can profit from this market without throwing caution to the wind. One is to look for stocks that have a low beta. Beta is a measure of a stock’s volatility in comparison to the rest of the market. A stock with a beta of 1, for example, means that investors can expect the price movement of the stock to be closely correlated to the market. A beta of more than 1 means the stock price will be more volatile (higher highs but lower lows).
What you’re looking for is a beta of less than 1. This means that the stock is less volatile than the broader market. While this may mean lower highs, it also generally means lower lows.
And many of these stocks are in defensive sectors. This means that their performance is consistent under both good and bad economic conditions.
View the "7 Stocks That Risk-Averse Investors Can Buy Now".