Well, we took a brief break yesterday but I’m now back at it — looking at Hilary Kramer’s “Barn Burner” pitches for her Breakout Stocks Under $10 newsletter.
The basic idea, if you’ll recall, is that she’s picking low-priced stocks (that’s the “Under $10” part) that she thinks will break out either because they are about to “supercharge” growth, are bargain priced, or are in a turnaround that she expects to be successful.
And the first pick, which we went through on Monday, was Fortegra Financial (FRF), a tiny little company that’s trying to grow in specialized insurance-like niches like credit protection, extended warranties, and auto clubs. I wasn’t all that excited about the stock, but perhaps you will be.
So what, then, are the two other picks that Kramer teases? Here are the clues for the next one:
“Barn Burner #2 — The Boutique Money Bomb: This is another underpriced, poised-for-rapid-growth stock. They manufacture premium clothing and accessories…and they’ve got the market all sewn up, pushing other high-end competitors out of the way.
“They’re asking $159 for a ‘basic’ pair of blue jeans — and getting it. Their outerwear goes for as much as $500.
“What’s not to like in this company? It costs about the same to make a $159 pair of jeans as it does a $20 pair.
“But the difference is all in the name. And this company’s name is hotter than an inferno.
“It’s locked into every high-end department store. Check out who’s proudly pushing their apparel:
- American Rag
“Plus, this company has captured the imagination of fashion and prestige-minded people overseas … in 25 other countries!”
OK, so I’ve got a couple ideas about premium denim companies even before we toss this one into the ol’ Thinkolator — but how about a few more specific clues to make the job easier?
“Recently, they’ve experienced massive success with 28 of their own direct retail locations.
“But why do I think there’s a coming breakout? Three reasons:
- They’re going to expand their highly successful factory-direct stores from 28 to 100 locations— a near quadruple increase!
- Instead of just a “girly” store, they’re going after the lucrative upscale men’s market
- They’ve committed to expanding their international sales — which management says will soon account for a whopping 30% of already red-hot sales”
So who is this one? Kramer is teasing: Joe’s Jeans (JOEZ), a Southern California premium denim company in a similar vein to the brands True Religion, 7 for all Mankind, Diesel, etc. Most such brands are either tiny boutique designer/manufacturers who are private, or part of large brand conglomerates like VF Corp, but JOEZ is a teeny independent still, and trying to grow.
They are one of the many brands in a very competitive landscape, so it’s perhaps not surprising that they have not grown profitability as quickly as they would have liked — back in 2012 optimism abounded with a new Macy’s line (the Else brand, targeted at younger women and at a lower price) helping to boost revenue, and they were saying all the right things about expanding their store count to 100 by 2017 (they did have 28 direct sale stores, both boutiques and outlets, a few quarters ago … it’s in the low 30s now) and expanding internationally, but they haven’t quite hit the “consistent profitability” level, probably because revenue growth has not been dramatic in recent years.
Over the last six quarters they’ve averaged about $30 million in quarterly revenue and haven’t had any consistent margin improvements, so the earnings just haven’t percolated up. They earn a penny or two most quarters (the share price is only $1.20 and it’s an $80 million market cap, so rounding matters), but the few analysts who cover the stock don’t see profitability around the corner, either, and there’s certainly some risk in buying a retail stock after what was widely reported as a bad traffic/high discounting holiday season for most retail stores.
So why would you buy? Well, they are expanding — the store count is still expected to grow, and a look at the balance sheet would tell you that they do have the cash to put into it for at least a little while (they have about $16 million in cash and only about $3 million in debt) … but there’s an important caveat there: That balance sheet, from the August quarter, is now woefully out of date because JOEZ just closed on a company-doubling (almost) purchase of privately held Hudson.
Joe’s bought Hudson from a private equity firm for $98 million, mostly in debt, so they’re going to be loaded up with $80 million or so of debt, including convertible debt. Hudson’s revenues were on pace for between $75-80 million in 2013, depending on the holiday quarter (according to the supplemental filings after the close of the deal Hudson had sales of $60 million for the first three months, up about 10% from 2012 … 2012 full year was about $75 million). Hudson has been growing at a steady “high single digit” pace for years, we’re told, and from a quick look at the filings they’ve largely been break-even or slightly profitable, thanks in part to the interest expense paid to their private equity owner — margins and profits are pretty similar to JOEZ at first glance.
So that means the company will have substantial debt, with the enterprise value moving up to about $200 million, but they will also have trailing sales of something in the neighborhood of $200 million. If they can get growth re-started and build a strong brand there could certainly be some value there, and there are plenty of folks who think the “premium denim” trend is still hot and will remain so (I’m wearing a pair of Hudson jeans right now … they’re awful comfy. And I’m sure they must make my caboose look fabulous, it’s just that folks are too shy to tell me so). But growth is really not there yet, not in any exciting way. Which is probably why it’s at $1.20 instead of the $2 or $3 it peaked at in recent years.
The foreseeable upside is probably a steady climb in sales and a faster rollout of stores if they can keep their brand positioning right and not discount too heavily (on their website, Joe’s Jeans is having a season-end sale right now, Hudson’s isn’t … doesn’t necessarily mean anything) and a lot of cost cutting of overhead, but it doesn’t look like they’re focused on cost cutting at the moment.
Some of the big takeovers in the past decade or so show potential for Joe’s, with True Religion getting bought out last year at $835 million following twelve months of roughly $480 million in sales, and 7 For All Mankind getting bought out by VF Corp (VF) in 2007 for $775 million with then annual sales of about $300 million. So if your brand is hot and you can keep growing revenue and maintain some pricing power, there seems to be room in the growing premium-denim market for high valuations up to 2X sales or so even if you’re not growing really fast (True Religion was seeing somewhat stalled growth when they were bought, apparently). Right now, the guess would be that the newly combined JOEZ is trading for about 1X sales and has a pretty leveraged balance sheet, so they need a good quarter and they need to be optimistic about growth and actually deliver on growth if you want the stock to get appreciably higher from here. It could certainly happen, but by my read it depends a lot on fashion and execution of this large acquisition, since Joe’s record at generating substantial revenue growth is a little suspect. This is a big corporate shakeup, the acquisition of Hudson, so if you’re betting on JOEZ here as Kramer is you’re expecting the acquisition to go well … and preferably, for them to report an excellent quarter with booming sales for the holiday period.
Brands can be fickle, especially pretty young and small ones like Hudson and Joe’s, so I have no idea whether they’ll grow well or not. It’s pretty hard to compete with goliaths like brand acquirer VF Corp on price or margin, since those large companies are far more efficient … but you never know when a retailer will get really hot and become an incredible investment. Well, maybe you do — I don’t. It seems cheap at $1.20 per share just because it was much higher in the recent past, but it’s not really making a profit and the company has also seen 50 cents a share in recent years. Big mergers and a newly larded up balance sheet increase the hope and the uncertainty, but it’s really all about whether they can really recharge their growth engines. If you know the answer to that, you’ve studied the premium denim market far more closely than I have.
Well, I didn’t mean to babble on about expensive jeans for so long — we’re out of time today … but I do want to just give you the quick answer to the third Barn Burner and let you evaluate it yourself. Here are the clues:
“Barn Burner #3 — The World’s Employment Agency: Here’s a turnaround so powerful it should make any investor’s mouth water.
“Being an employment company, they took a big hit during the recession. And with a fragile post-meltdown job market, companies were hardly hiring.
“But now employment is finally showing signs of life. Employer job requests are up. So much so, that many specialty jobs are going unfilled.
“And since this company is a global employment powerhouse, they’re also capitalizing on the stabilizing European economy. And their marketing campaigns in the U.K. are bearing fruit.
“Plus, they lead the market in Asia — especially South Korea and India.
“And at home?
“Over 90% of Fortune 1000 companies use their services.
“And here’s the kicker – this undervalued company has made many structural changes and is ready for a turnaround.
“I’m betting they’re on the brink of a quick 50% breakout. Maybe even more.”
Not a huge number of clues, but this is almost certainly Monster Worldwide (MWWW), the old Monster.com job board that’s trying to maintain its position. It’s still a large company and it does have 95% of the Fortune 1000 as customers, but they’ve lost most of their stock market value in recent years, have sold off some assets, and it’s widely perceived that new competitors and social media (like LinkedIn) are eating their lunch. I have not looked at their business in years, so I’ll leave it to you to make the call on whether they’re poised for 50% plus gains in their turnaround. Anyone?
That’s all for today, folks — chip in with your opinions using the friendly little comment box below. Thanks!