Perhaps none other than late Senator John McCain broadcasted both the appeal and the pitfall of motorcycle icon Harley-Davidson (HOG). During the 2008 presidential campaign, McCain declared emphatically that he’ll “take the roar of 50,000 Harleys any day,” a sharp dig at then-rival Barack Obama and his appeal to a global audience rather than a purely American one.
It made for great drama. Indeed, nothing quite encapsulates the American spirit quite like a rumbling Harley storming across a dusty highway. At the same time, such romanticism largely appeals to older consumer demographics; namely the baby boomers and first-out-of-the-gate members of Generation X. For young millennials and Gen Z, HOG stock is effectively anathema to their go-green idealism and avocado toast.
To be fair, Harley recognizes the new realities of the consumer economy and has adapted appropriately. For example, Barchart contributor Will Ashworth pointed out that the motorcycle manufacturer completed its spinoff of LiveWire (LVWR), its electric bike division. However, through ownership of HOG stock, investors can still own a large chunk of the business.
Earlier this year, I stated that social normalization trends – such as the return to the nine-to-five grind – could inspire a reaction similar to a midlife crisis. Basically, consumers may want to recapture a sense of freedom before succumbing to the cubicles.
However, even then, I only gave a half-hearted nod to HOG stock. By the start of May, I stated for another publication that Harley’s culture clash with Gen Z might derail the motorcycle stalwart. In retrospect, I’m glad I made that call. Still, it might be time to reconsider the bullish contrarian narrative.
HOG Stock Might Be So Bad, It’s Good
By most accounts, investors should steer clear of HOG stock. If you believe that the derivatives market gives you a clue as to what the smart money is doing, Harley isn’t exactly giving off great signals based on Barchart’s latest results for unusual stock options volume.
Following the close of the June 27 session, total volume hit 8,950 contracts against an open interest reading of 48,210. Further, the delta between the Tuesday session volume and the trailing one-month average metric came out to just under 300%. Drilling down, put volume clocked in at 8,295 contracts while call volume mustered only 655.
The pairing yielded a put/call volume ratio of 12.66. Per Barchart, the put/call open interest ratio is 0.92, which isn’t exactly a great signal for the bulls. If that wasn’t enough, Fintel’s options flow data showed traders buying puts by the boatload on Tuesday – a classic hallmark of bearish sentiment.
Oh yeah, if you needed additional confirmation, the Barchart Technical Opinion indicator pegs HOG stock as an 80% strong sell. Again, the lesson seems to be, if you don’t need to buy Harley-Davidson shares, don’t.
Nevertheless, there is such a thing as a security being so bad, it’s good. When seemingly everybody takes the same side of the argument, an opportunity exists for contrarians to bet on a dark horse catalyst. Notably, in the trailing one-month period, HOG stock gained almost 7%.
In addition, analysts generally remain hopeful. Among seven expert voices, two rate shares a strong buy, one a moderate buy and the remainder a hold. Overall, the consensus stands at a generous moderate buy. Also, the mean price target among analysts calls for HOG stock to hit $43. That’s 26% up. Even the low target of $36 is higher than the time-of-writing price of $34.13.
Again, it’s time to rethink Harley-Davidson.
A Compelling Value Proposition
Although HOG stock certainly has its risks as mentioned earlier, it’s also enticing from a valuation perspective. Primarily, the market prices shares at a forward multiple of 7.03, which is significantly undervalued.
While it’s difficult to classify Harley-Davidson, if we look at the forward multiple of the auto and truck manufacturing space, it features an average ratio of 10.18 times. If we look to the automotive retail sector, this space prints a forward multiple of 11.29. Either way, 7.03 sits well below either 10.18 or 11.29.
Further, Harley is steadying itself after a rough bout with COVID-19. In 2020, revenue fell more than 24% against the prior year to $4.05 billion. However, the company marched forward, punching in sales of $5.76 billion last year. On a trailing-12-month basis, Harley’s looking at a revenue haul of $6.05 billion. Plus, with a Piotroski F-Score of 7, this rating indicates a decent level of operational efficiency.
Of course, Harley still has a long way to go before achieving credibility among the masses. Still, if you have some pocket change, now might be a good time to gamble on HOG stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
