Interest rates and PE ratio expansion: S&P 500 going above 4100 before the end of 2020?

Summary

- Most professional investors see price/earnings (PE) ratios as inversely proportional to interest rates.

- Mathematically, this would be expressed as: PE = k / IR.

- Assuming that the interest rate on 10-year Treasuries could rise to 1%, and the k multiplier to rise to the pre-COVID level of 0.39, the expected S&P 500 PE ratio would then be 38.66.

- This would bring the S&P 500 up to 4,148. Still, not as expensive, in PE ratio terms, as in either the 2000s dot-com bubble or the Great Recession.

Interest rates and PE ratios

Most professional investors, including the late Benjamin Graham (), see PE ratios as inversely proportional to interest rates for Treasuries. Mathematically, this would be expressed as follows, where PE = the PE ratio of an equity security, IR = a relevant interest rate, and k = a multiplier.

PE = k / IR

There are a couple of key reasons for this relationship. One is that Treasuries become less attractive as an investment when interest rates go down. Since the Treasuries market is very large, a little over $21 trillion at the time of this writing, even a fraction of it moving to equities would push their PE ratios up significant.

Another key reason for the relationship above is that investing in Treasuries when interest rates are low becomes risky in terms of principal preservation. Treasury prices are inversely related to the interest they pay, or their yields. When yields are very low, the tendency is for them to go up.

Interest rates on 10-year Treasuries

The figure below shows the interest rates for the 10-year Treasury notes from January 2007 to July 2020. Those rates, which influence a number of other consumer-relevant rates (e.g., those for mortgages), go from 4.76% to 0.55% during the period.

While the interest rates have been going down over the years, they went up significantly during the recovery from the Great Recession. The same may happen during the recovery from the COVID recession. A move from 0.55% to 1% would be significant.

S&P 500 PE ratios

The figure below shows the PE ratios for the S&P 500 from January 2007 to July 2020. Note that the PE ratio for July 2020 is nowhere near the peak during the Great Recession.

The k multipliers

Finally, the figure below shows the k multipliers for the relationship between the S&P 500 PE ratios and interest rates on 10-year Treasuries from January 2007 to July 2020. An all-time low was reached for the multiplier in July 2020.

In a low interest rate environment, a high k multiplier would typically be associated with a high PE ratio. The multiplier increase, if it happens, should lag the interest rate reduction. Investors need time to be convinced that interest rates will remain subdued. 

S&P 500 above 4,100 soon?

Assuming that the interest rate on 10-year Treasuries could rise to 1%, and the k multiplier to rise to the pre-COVID level of 0.39 (which is below its historical average), the expected S&P 500 PE ratio would then be 38.66. This would bring the S&P 500 up to 4,148. Still, not as expensive, in PE ratio terms, as in either the 2000s dot-com bubble or the Great Recession.

This PE ratio expansion for the S&P 500 is already happening at the time of this writing, with the S&P 500 hitting an all-time high. Our main point in this post is that, if interest rates on Treasuries remain low, we may see more of that - even with bankruptcies among small businesses, significant  unemployment, and high volatility (including downward corrections).

The business media is missing this: The rise of the immune

Summary

- The fastest growing “demographic” in the world today are those who are immune to COVID-19.

- This is bullish for equities, because those who are immune to COVID-19 are likely less hindered as consumers than those who are not.

- The equities that should benefit the most are those for companies at the epicenter of the pandemic.

- Why is the non-immune view the prevalent one in the business media? Probably because of the average age of those speaking and writing.

- The rising immune population so far is predominantly young.

The fastest growing demographic

The fastest growing “demographic” in the world today are those who are immune to COVID-19. At the time of this writing, there were 3.3 million confirmed cases in the US alone. Assuming that the actual cases are around 10 times the confirmed cases, we have 33 million cases in US.

If we consider the death rate to be 1 percent, this means that we will have about 30 million people with immunity to COVID-19 in the US very soon. Many are already immune. Even without a vaccine and some mitigation (e.g., masks), by the end of the year the number of immune people in the US could be 100 million. In the world, this number could be 500 million.

People want the immune around them

Herd immunity is seen as a desirable goal because of the idea that the immune form a protective barrier around the non-immune (). In this sense, immune people are a better barrier than social distance. For example, if you have an immune person in between two non-immune people, that may be better than six feet of empty space. The immune person is much more lethal to the virus.

High-risk individuals, such as the elderly, are advised to isolate themselves. However, social and physical isolation could negatively affect their health in various ways unrelated to COVID-19. The real problem is interaction with the non-immune, because of the risk of infection. Interaction with the immune is fine. Maybe more than fine, because of the benefits of social interaction, not to mention needed care. People will want the immune around them.

Media naturalness theory

With current commercial technology, virtual meetings are simply not a viable alternative for a species that evolved over millions of years communicating face-to-face. The naturalness of a communication medium (i.e., how similar it is to the face-to-face medium) leads to a number of effects. For example, low naturalness reduces physiological arousal. Also, low naturalness leads to more confusion, particularly when knowledge is being communicated ().

So, face-to-face meetings will be needed, particularly when knowledge-intensive tasks must be carried out. Imagine a non-immune person being asked to attend a face-to-face meeting with 5 other people, all using masks. Would that person like the idea of the meeting more if she knows that all of the 5 other people are immune? Probably yes. Maybe not 5, but 3. The more the better. Again, people will want the immune around them.

Businesses will want the immune

Airlines are being asked to keep middle seats empty. Imagine you getting on an airplane and going to your window seat, just to find out that someone is sitting next to you, in the middle seat. You do not like it, even though the person is wearing a mask. He tells you that he is immune, and shows you the results of an immunity test. Will that make you feel better? Probably yes.

Companies that are at the epicenter of the pandemic are airlines, bars, restaurants, amusement parks, and ride-sharing companies. All of these companies have a strong incentive to have the immune as their employees, partners, and customers. Would a non-immune person favor a bar where most customers are immune? Probably yes.

Is this bullish for equities? If yes, what equities?

Arguably this is bullish for equities, because those who are immune to COVID-19 will probably be less hindered as consumers than those who are not. It stands to reason that the equities that should benefit the most from this are those for companies at the epicenter of the pandemic. Essentially, the ones that suffered the most so far.

Virtually all of the discussion in the business media nowadays is from the standpoint of the non-immune. One hears things like: “… the consumer will be cautious going forward … the risk of infection …”, “… parks will never have the same sales again …”, “… the economy will never be the same …” etc. Think about these statements assuming that you are immune – they make little sense.

And the numbers of the immune are growing fast, even without a vaccine. They will grow a lot faster with one or more effective vaccines. Also, keep in mind that the immune are not only consumers themselves, but also enablers of consumption. For the economic recovery, they are worth their weight in gold!

Why is the non-immune view the prevalent one in the business media? This may be due to the average age of those speaking and writing.

The rising immune population now is predominantly young.

How could the March-June 2020 stock market rally have happened if $1T moved to the sidelines?

Summary

- As the rally in the S&P 500 happened, approximately $1T of money moved to the “sidelines”; that is, into money market funds.

- Of that $1T, about 20% was from retail investors and 80% from institutional investors.

- This is not what we have seen in previous recessions. Normally when money moves to the sidelines the S&P 500 goes down.

- One could argue that the money that is on the sidelines would be coming in to take advantage of pullbacks, as the new money that came in earlier is taken out to fuel consumption. Some of these pullbacks could be severe.

The March-June 2020 rally in the S&P 500

The figure below shows the rally in the S&P 500 during the March-June 2020 period. The index has gone from approximately 2,237 to 3,055; up about 36%.

We used the charting feature of Yahoo Finance (). The slow-moving line is the 52-day moving average.

About $1T moved to the sidelines

As the rally in the S&P 500 happened, approximately $1T of money moved to the “sidelines”; that is, into money market funds. This is illustrated by the figure below, with charts from FRED (). Of that $1T, about 20% was from retail investors and 80% from institutional investors.

The top chart shows the growth in money market funds from retail investors. For example, if an individual investor with an account on E-Trade (i.e., a “retail” investor) sells a stock position, that money typically will go into a sweep account tied to a money market fund. The bottom chart shows the growth in money market funds from institutional investors.

So, both retail and institutional investors moved a lot of money to the sidelines. This is not what we have seen in previous recessions. Normally when money moves to the sidelines the S&P 500 goes down.

Many people would interpret this as money leaving the financial markets, in absolute terms. This is not what happened. For each stock sale there must be a corresponding purchase. If investors on the sidelines are buying, and sellers are moving to the sidelines, there should be no significant change the in the total amount held by money market funds.

If investors are selling to raise cash, and stock prices are going up, there must be “new” money coming into the stock market at a higher rate than the rate at which investors are selling.

The Fed’s balance sheet grew by $2T during the rally

As you can see in the figure below, the Fed’s balance sheet grew by about $2T during the rally. It grew $3T from February. That is partly what fueled the rally.

This new money that has been “created” by the Fed takes some time to make its way into the hands of people who can buy stocks. So, what we are seeing here is the beginning of something interesting; a rather rare occurrence.

What does this mean? The bull case

One could argue that the money that is on the sidelines would be coming in to take advantage of pullbacks, as the new money that came in earlier is taken out to fuel consumption. Some of these pullbacks could be severe, because newcomers may be parking money in stocks as they would with a bank account - with money that they need to pay for recurring expenses.

This should propel the stock market higher after each pullback. The increase in consumption caused by the money coming out of the stock market may give the impression that the economy is recovering by itself. The ensuing optimism would push stocks even higher.

But the impression that the economy is recovering would be a mirage, at least early on. This highly volatile bull market would be largely driven by the liquidity injected by the Fed. The volatility would be triggered by mixed headlines; e.g., consumer confidence is up, but so is the government deficit.

We could see something like the S&P 500 reaching 4,000 amid a wave of bankruptcies! Not all companies will go bankrupt, of course. For each local “Supa Burger” that goes bankrupt, there will be a bit more market share for the local McDonald’s and Burger King competitors.

Active investing may shine brighter than passive (index funds) in this scenario. Active investors have to think about a number of issues, such as how failures in one industry can benefit leaders in another. As a Hertz goes bankrupt, Uber may benefit. (Disclosure: the author owns shares of UBER at the time of this writing; and also of MCD and QSR, for the references above.)

What does this mean? The bear case

It is hard to see a scenario where this new money printed by the Fed, the portion available for stock purchases, will all go to the sidelines due to pessimism. Money market accounts are paying very little, because Treasury yields are so low. Investors are compelled to put the money somewhere. The stock market is one of the only options.

It is not hard to see a scenario where inflation will grow due to an increase in money supply, even as GDP contracts. Inflation is bad for fixed-income investing, making Treasuries even less attractive, but inflation is not necessarily bad for stock investing. At least not while inflation is growing but is still relatively low (e.g., low single digits).

This creates a positive feedback loop for stocks!

However, this is a bad scenario if maintained for too long, which could bring about severe economic strain, and another major drop in the stock market. High inflation would eventually prompt the Fed to increase interest rates, without a robust economy to compensate for that tightening if GDP is contracting.

But this bad scenario may take a few years to materialize.

What has been moving the price of bitcoin since 2019?

Summary

- In this post we conduct a structural equation modeling analysis, as a general case of a multiple regression analysis, to understand what has been moving the price of bitcoin since early 2019.

- To make our discussion more practical, it is based on financial instruments that can be easily traded with a typical brokerage account.

- Our results are consistent with the expectation that the price of bitcoin will continue going up as long as we are in a “nervous” bull market, where things seem to be improving but investors are still looking for ways to protect themselves against a possible economic collapse.

- That is, at least until the collapse happens, when bitcoin may simply go down like almost everything else.

The funds that we use in our analyses

In this post we conduct a structural equation modeling analysis, as a general case of a multiple regression analysis, to understand what has been moving the price of bitcoin since early 2019. To make our discussion more practical, it is based on financial instruments that can be easily traded with a typical brokerage account.

The financial instruments, for which daily prices from January 2019 to April 2020 were used, are: Grayscale Bitcoin Trust (GBTC), SPDR Gold Shares (GLD), iShares U.S. Regional Banks ETF (IAT), Invesco QQQ Trust (QQQ), iShares Silver Trust (SLV), SPDR S&P 500 ETF Trust (SPY), iShares 20+ Year Treasury Bond ETF (TLT), and Financial Select Sector SPDR Fund (XLF).

Bitcoin since 2019

The figure below shows the variation of the GBTC over time. Note the spike in price in late 2017. That was due to a number of factors, not the least of which being a general optimism about the use of bitcoin for payments. At that point some held the perception that bitcoin would make banks and other financial companies obsolete. That turned out to be an incorrect perception, and bitcoin's price dropped steadily until early 2019.

That situation changed around early 2019, when arguably the prevailing perception of bitcoin was that of a store of wealth. Something akin to digital gold, with the advantage of not having to be physically stored or transported. As such, individuals could also use bitcoin to easily move money around the world without paying any fees.

Digital gold, like gold, could presumably be used as a hedge against losses in equities. That is an appeal of bitcoin, which is shared by other instruments, notably silver and treasuries. Silver also has industrial applications. Treasures are essentially US government debt instruments with various maturities.

The results of our analyses

The model in the figure below was created with WarpPLS () as a basis for our analyses. This would be a simple multiple regression model if it were not for the aggregation of funds into three predictor “latent” variables.

The predictor latent variables can be seen as indices: FIN, for financials; HDG, for instruments that can be used for hedging; and MKT, for equities whose price is a general reflection of the stock market in the US.

WarpPLS creates the indices based on the component instruments by linearly matching weights with loadings. Weights are obtained by regressing the index on its components, and loadings by regressing the components on their index.

The figure below shows, among other things, the regressions of GBTC on the tree predictor indices. These are not the weights and loadings mentioned above; they are higher-level coefficients, or “structural” coefficients (in the technical jargon of this area of statistics). Also, they are standardized, which means that they can be directly compared against one another.

These results suggest that GBTC (standing in for the price of bitcoin) is significantly and positively associated with FIN, HDG and MKT. The statistical significance here is indicated by the P values lower than 0.01, meaning that the probability that those effects are not “real” is less than 1 percent.

So, if we assume that the hypothesized directions of causality are correct, then the price of bitcoin goes up when financials go up, and when the market goes up; but much more so when instruments that can be used for hedging (HDG) go up in value. The standardized regression coefficient for the latter association is a much higher 0.41 than those for the other predictors (both approximately 0.15).

There are intercorrelations among the variables, as we can see from the correlations table below. Even though some correlations are high, there is no multicollinearity in our model. We tested this via full-collinearity variance inflation factors.

Also, since the diagonal shows the square roots of the average variances extracted for each variable, one would normally see correlations higher than values on the diagonal if there was multicollinearity. Given that this is not the case, the table also suggests that the model has acceptable discriminant validity.

Conclusion

The fact that the price of bitcoin is positively associated with financials goes against the idea that there is a general perception among investors that bitcoin may make some of the functions performed by banks and financial organizations obsolete. Also, the price of bitcoin being positively associated with the broader market does not provide support for the idea of it being very effective when used as a hedge against market downturns.

Our results do seem consistent with the expectation that the price of bitcoin will continue going up as long as we are in a “nervous” bull market, where things seem to be improving but investors are still looking for ways to protect themselves against a possible economic collapse. That is, at least until the collapse happens, when bitcoin may simply go down like almost everything else.

Data from China suggests that economic activity could resume after initial containment and not trigger new COVID-19 cases

Summary

- A study was published in early 2020 by Ainslie and colleagues (), suggesting that, after initial containment is achieved, within-city movement (measured through a “Movement Index”) seems to be uncorrelated with new COVID-19 cases.

- Within-city movement is used in the study as a proxy for economic activity.

- Economic activity seems to have successfully resumed within approximately 2 weeks from containment, and approximately 4 weeks from the peak of new cases.

Within-city movement vs. new COVID-19 cases

The graphs below summarize key results from a study published in early 2020 by Ainslie and colleagues (). Dr. Ainslie is in the Faculty of Medicine, School of Public Health, Imperial College London. The study looked at within-city movement, as a proxy for economic activity, and how that movement has influenced the numbers of new cases of COVID-19 in various areas, after initial containment.

As you can see, after initial containment is achieved, within-city movement (measured through a “Movement Index”) seems to be uncorrelated with new COVID-19 cases; or somewhat negatively correlated, as the authors note. This rather surprising and counterintuitive outcome may be due to people becoming much more cautious about social interactions.

Time to resumption of economic activity

Note from the graphs that economic activity seems to resume within approximately 2 weeks from containment, and approximately 4 weeks from the peak of new cases.

Also note that containment has been fairly effective in China. The Chinese government has enforced it through strict lockdowns. Perhaps this is what makes people so cautious about social interactions afterwards, which we speculate might be at the source of the success of their strategy.

From an economic revival perspective, these are good news – particularly if the same approach can be replicated in other countries and regions.

A simulation-based valuation of DXC Technology (DXC): March 2020

Summary

- DXC Technology (DXC) is a technology consulting and services company headquartered in Tysons Corner, Virginia ().

- Launched in April of 2017, DXC was created from the merger of Computer Sciences Corporation (CSC) and the Enterprise Services division of Hewlett Packard Enterprise (HPE).

- In this post we provide a simulation-based (sim-based) valuation () of DXC.

- Our results suggest the following fair values – stock price: $64.12, and price-to-earnings ratio: 9.96.

- DXC currently trades at $15.14, so it appears to be undervalued, with a potential upside of 323.51%.

DXC Technology (DXC)

DXC Technology (DXC) is a technology consulting and services company headquartered in Tysons Corner, Virginia. Launched on April 3, 2017, DXC was created from the merger of Computer Sciences Corporation (CSC) and the Enterprise Services division of Hewlett Packard Enterprise (HPE).

The company operates in more than 70 countries, and counts among its customers several federal and regional government agencies. In many ways DXC is similar to Accenture (ACN). In fact, DXC has a new CEO, Mike Salvino, who previously served as group CEO for Accenture Operations.

Estimating a fair value for the stock

In this post we provide a simulation-based (sim-based) valuation () of DXC.

At the time of this writing the company had a negative net profit margin of -8% and a price-to-sales ratio of 0.26. The company has great growth potential, as long as it transitions from legacy technology services to more modern offerings (e.g., cloud applications). This transition seems to be a major focus of the new CEO.

To be somewhat conservative, we will use recent numbers from Accenture to set our sim-based estimated earnings growth rate for the next 5 years (6.47%) and net profit margin (11.06%). We believe this to be a conservative approach because DXC is much smaller than Accenture; e.g., DXC’s revenues are about half of Accenture’s.

Another reason why we believe the above is a conservative approach is that it is quite possible that we currently are in a recession (yes, already), in which case earnings growth should be much higher than it is now in the near future. Sales are likely to go up, and so should earnings – the latter at a faster pace, leading to higher margins for many of DXC’s services (the same goes for Accenture).

The table below summarize our sim-based results.

Since our sim-based analysis uses a S&P 500 return as a basis, our results summarized on the table above suggest the following fair values – stock price: $64.12, and price-to-earnings ratio: 9.96. DXC currently trades at $15.14, so it appears to be undervalued, with a potential upside of 323.51%. Yes, you read it right. The company seems to be more than simply cheap; it appears to be dramatically undervalued at the moment.

Note that we assumed a positive net profit margin of 11.06% for a company that actually has a net profit margin of -8%. This type of assumption is useful in valuing companies that have a negative profit margin, which is often the case with companies that have been experiencing problems; as well as high-growth companies that have been publicly-traded for only a few years.

Other pluses and minuses

DXC pays an attractive dividend of 5.11%, significantly higher than the average S&P 500 dividend. With DXC’s market capitalization of $5 billion, this translates to roughly $255 million per year given out in dividends. DXC has $2.56 billion in cash, so we think that the dividend currently is relatively safe, and will continue being so for several years to come.

While certainly leveraged, DXC has a reasonably attractive balance sheet, with EBITDA in the neighborhood of $3.26 billion. This, added to its cash position of $2.56 billion mentioned above, is actually lower than half of its $10.49 billion dollar debt. So, DXC is leveraged, but much less so than many other companies with much higher valuations.

Is DXC a value trap?

Why does DXC look so undervalued? The reason is a combination of what appears to have been a period of disorganized growth, bad management decisions, somewhat disappointing guidance, the resignation of the former CEO in late 2019; and now, to cap all of this, we have the coronavirus pandemic.

Given the new CEO’s caliber, it is reasonable to expect better stewardship of resources. The coronavirus pandemic is prompting major actions from the US government, including interest rate cuts that should make it easier for DXC to service its debt.

The US government is also promising “as much liquidity as needed”, to avoid layoffs. This means essentially unlimited credit to companies, so that unemployment remains low; this promised by the entity that can print unlimited amounts of it is own currency, the US dollar.

The mighty Office of the US President is fully committed. And we are in an election year. Note that it is not a recession that creates re-election problems for an incumbent US President. Those problems are actually caused by the significant rise in unemployment that usually accompanies a recession. And there can be a recession without unemployment, at least in theory, as long as the country is willing to get into debt up to its ears.

It does not seem like DXC is a value trap; at least not at the current levels. DXC is currently trading at prices not seen since 2012. It has reached a high in the mid-$90s quite recently, in late 2018. If anything, it looks like a big opportunity for investors, as long as the US government keeps its promises of liquidity to address coronavirus-induced sales losses.

Disclosure

The author owns DXC shares at the time of this writing.

A simulation-based valuation of Conn's, Inc. (CONN): February 2020

Summary

- CONN is an American furniture, mattress, electronics and appliance store chain headquartered in The Woodlands, Texas ().

- In this post we provide a simulation-based (sim-based) valuation () of CONN.

- At the time of this writing, the company had a rather low trailing twelve months price-to-earnings ratio of 3.62.

- According to our sim-based analysis, the fair price-to-earnings ratio should be 5.46, leading to a current fair value of $13.81.

- CONN currently trades at $9.16, so it appears to be undervalued, with a potential upside of 50.76%.

- The above conservatively assumes a negative earnings growth rate. Let us say that the company manages to simply have no growth (i.e., 0% growth) in earnings for the next 5 years, instead of negative growth. In this case, our sim-based analysis suggests that the fair price-to-earnings ratio should be 7.19, leading to a current fair value of $18.20. This would mean a potential upside of 98.69%.

Conn's, Inc. (CONN)

CONN is an American furniture, mattress, electronics and appliance store chain headquartered in The Woodlands, Texas (). The company caters to credit-challenged customers, and also operates in the lease-to-own space. It has been around for a long time. It was founded in 1890 as Eastham Plumbing and Heating Company, having been renamed as Conn's in 1934.

Estimating a fair value for the stock

In this post we provide a simulation-based (sim-based) valuation of CONN. The foundation of this approach is explained in a previous post ().

At the time of this writing, the company had a rather low trailing twelve months price-to-earnings ratio of 3.62. The expected growth in earnings for the next 5 years is uncertain. Based on the most recent earnings report, when the company beat estimates, the expectation is that earnings will drop by approximately 5.55% in the near future. To be conservative, we will consider this value, of -5.55%, to be the sim-based earnings growth rate for the next 5 years.

Is the low price-to-earnings ratio of 3.62 suggestive of actual undervaluation? As you can see in the table below, the answer to this question seems to be “yes”. Since our sim-based analysis uses a S&P 500 return as a basis, the fair price-to-earnings ratio should be 5.46, leading to a current fair value of $13.81. CONN currently trades at $9.16, so it appears to be undervalued, with a potential upside of 50.76%.

Keep in mind that the above assumes a negative growth rate. Let us say that the company manages to simply have no growth (i.e., 0% growth) in earnings for the next 5 years, instead of negative growth. In this case, our sim-based analysis suggests that the fair price-to-earnings ratio should be 7.19, leading to a current fair value of $18.20. This would mean a potential upside of 98.69%.

Other pluses and minuses

The business in which CONN operates is less likely to be affected by what has been called the Amazon-driven “retail apocalypse”. Moreover, CONN can be seen as a somewhat defensive stock in the case of an economic downturn, since it primarily caters to credit-challenged customers. When the economy slows down, the number of credit-challenged individuals usually goes up.

Having said that, an economic downturn could lead to an increase in defaults, potentially hurting CONN’s ability to collect from its customers. One way to address this challenge would be to increase CONN’s participation in the lease-to-own space, but in a way that would allow it to operate more as a renter of its products. This seems to be a direction that CONN’s management is looking at carefully in recent quarters.

In the last two quarters, the company bought almost $100 million of its own stock, which makes sense given that the stock price has gone down so much. It has also been retiring debt at a very healthy pace, although it is still very leveraged. Last quarter, however, it issued about $8 million in debt, in part to buy its own shares – about $58 million worth of shares were purchased.

Short sellers may be interpreting the above share purchases as an attempt to prop up the stock price. The current short interest as a percentage of float is a frightening 65.96%. Still, it is hard to question the logic of buying your own shares when they are so cheap, especially given that interest rates are at their lowest point in years. If the company were to re-issue its shares at the more conservative fair value we estimated in this post, it could make a significant profit, which it could use to reduce its debt further.

There is no evidence that the company is anything but conservative in its future earnings growth  projections. It has beaten earnings expectations in at least the last 10 quarters, often by a large margin.

Disclosure

The author owns CONN shares at the time of this writing.