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Why This Top Retail Stock Is Poised To Fly High

By Anders Bylund - Feb 29, 2020 at 3:11PM

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This arts and crafts retailer is priced for absolute disaster, but the business is humming along with stable sales and solid profits.

Arts and crafts retailer The Michaels Companies (MIK) might not look like the most obvious winner on the market today. The stock has plunged 72% lower over the last 52 weeks, posting spotty earnings and sales along the way, and has installed a new CEO to boot.

But that's the downturn that set Michaels up for a market-crushing rebound in 2020 and beyond. I think you'll agree that this company is more stable, profitable, and promising than the plunging stock chart might indicate.

A rendering of a cartoon-style rocket taking off from an outstretched hand.

Image source: Getty Images.

This massive discount makes no sense

Michaels' stock has been relegated to Wall Street's bargain bin. The stock trades at 2.3 times trailing earnings, 1.8 times forward estimates, and 1.4 times free cash flows. These are valuation multiples normally reserved for companies on the brink of bankruptcy and delisting from the stock market.

Except, you'll note that Michaels is quite profitable. The company generates solid earnings and even stronger cash flows, despite slowly falling top line sales. When you look at the company's market value in the context of its solid profit streams, you get this crazy chart:

MIK Free Cash Flow Chart

MIK Free Cash Flow data by">YCharts

This stock's deep-discount valuation looks even more inviting when you look at the sterling pedigree of Michaels' new CEO. Ashley Buchanan spent 12 years at retail titan Walmart (WMT 0.99%), most recently serving as that company's chief of e-commerce operations.

If you were worried that this seasoned retailer would fall back on tried and no-longer-true traditional business tricks, I would remind you that Buchanan entered Walmart from the tech sector. His resume includes eight years of high-level management positions with computer systems giant Dell (DELL -0.79%) and IT consulting veteran Accenture (ACN -0.17%).

What's next for Michaels?

We'll know more about Buchanan's technology-based business plans when the company reports holiday-quarter earnings on March 17. Until then, we're looking at a deeply misunderstood and drastically undervalued company, whose unique niche in the retail landscape is fairly well insulated against e-commerce threats. Customers in the arts and crafts market generally like to hem and haw over their choices in person.

So Michaels is poised to skyrocket from this deep plunge. Give Ashley Buchanan some time to straighten up the company's most glaring problems, and then give skeptical investors some time to understand what's going on here.

Michaels is actually a high-quality retailer whose stock is on fire sale for some questionable reasons.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Accenture. The Motley Fool recommends The Michaels Companies. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Michaels Companies Stock Quote
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Wal-Mart Stores, Inc. Stock Quote
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