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Why The Michaels Companies Stock Is Soaring Today

By Anders Bylund – Jun 8, 2020 at 2:21PM

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A renowned analyst firm called Michaels out as a fantastic value investment at these low prices. Please take that claim with a cup of salt.

What happened

Shares of The Michaels Companies (MIK) soared on Monday. As of 1:38 p.m. EDT, the stock traded 51% higher based on a rosy analyst report.

So what

The arts and crafts retailer reported first-quarter results last Thursday, showing a 28% year-over-year revenue drop and a net loss of $0.43 per share. Both results were lower than expected, but the stock rose by double-digit percentages anyway because Michaels also said that 79% of its stores were open for business.

Analyst firm J.P. Morgan pondered these results for a few days before releasing a glowing analysis of Michaels. The firm gave Michaels an "overweight" rating and added it to a focus list as a strong value idea. The price target was lifted from $7 to $13 per share, 135% above Friday's closing price and another 57% above the current share prices.

A young businesswoman throws up her hands with a confused frown.

Image source: Getty Images.

Now what

J.P. Morgan analyst Christopher Horvers argued that many retailers are good buys at current prices under the assumption that the economy will continue to recover from the COVID-19 shutdowns of the past few months. Michaels would be a leading value among that group due to improving margins into 2021, a new management team, and a clear path to positive same-store sales growth.

I do agree that Michaels would be a great value under those assumptions, trading at just 5 times trailing earnings and 2.6 times free cash flows today. That's asking for an unrealistic amount of market improvements, though. J.P. Morgan's investment thesis will fall apart in a hurry if a second wave of COVID-19 infections comes along, forcing nonessential retailers like Michaels to close their stores again.

You can gamble on a quick market rebound by investing in Michaels at these low prices, but I would not recommend that you back up the truck and bet the farm. There are lots of far safer investments available in these uncertain times.

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

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