Sometimes the Zacks “Bear of the Day” is a company that’s on the wrong end of business trends, positioned poorly, managed badly or otherwise in some sort of obvious trouble.
This is not one of those times.
Interactive Corp (IAC), the media and internet company run by Barry Diller and Joey Levin is a great organization. They hold a diverse set of valuable assets and are the type of conglomerate that can usually be expected to perform well even during difficult economic times.
Furthermore, because their businesses operate primarily online rather than relying on in-person transactions, theoretically, they shouldn’t see nearly the negative impact on business that’s currently being experienced by more traditionally structured companies.
So what’s the issue that lands IAC on the “Bear” side of the page?
Simply a share price that has come too far, too fast - as well as full-year estimates have been falling.
As the markets began to recognize that the impact of Covid-19 was going to be enormous, almost all stocks sold off sharply. Only a handful of truly defensive stocks were spared the carnage. The S&P 500 fell by more than 33% between February 20th and March 23rd.
As Covid-19 cases appear to be leveling off, pharmaceutical companies race to develop vaccines and therapeutics and states and municipalities consider how they can begin reopening, stocks have mostly recovered and the S&P currently sits at 2923 – still off more than 10% in 2020 – but also well above those March lows.
Shares of Interactive Corp got hit pretty hard as well, bottoming at a closing low of $130.75/share on March 20th. Like the broad markets, they’ve recovered dramatically, closing Tuesday at $259.13 – a nearly 100% gain from those lows just two months prior and nearly unchanged on the year.
That’s a truly remarkable recovery, but it also means IAC has become a very expensive asset, trading at a 12 month forward P/E ratio of 166X.
Seven downward revisions in the past 60 days have taken the Zacks Consensus Estimate for full-year earnings from a net profit of $4.07/share to a loss of ($1.20).
IAC’s net profits in 2019 were $4.53/share.
To be fair, analysts do expect the 2021 net to rebound back to a profit of $5.77/share, though that’s a long time for investors to wait in an environment as uncertain as we’re currently experiencing. Plus, even that estimate has come down from $7.89/share over that same 60-day period.
Those downward revisions earn IAC a Zacks Rank #5 (Strong Sell).
Here’s the bottom line:
A lot of stocks got severely – and unfairly - punished during those dark days in March when it seemed like no one was ever going to want to own equity shares again. Unprecedented fiscal and monetary stimuli and a little bit more perspective on just how bad the outbreak is actually likely to be have breathed new life back into most of those stocks.
Additionally, IAC is a juggernaut. Personally, I wouldn’t bet against Levin and Diller and their proven strategy of creating and/or purchasing the platforms that customers demand. So I'd be careful with any potential short position (though the deterioration in the financials did land IAC on the algorithmic-based Zacks Short List this week.)
This is also probably not the right environment to own a high-dollar stock that’s basically priced for perfection during a time when we don’t exactly know what “perfection” might be.
Today’s “Bull of the Day” – AbbVie (ABBV - Free Report) - develops life-saving drugs, takes in 9 times the annual revenues of IAC, earns 11 bucks a share, pays a 5% dividend and trades at a forward P/E under 10X.
You do the math..
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