I’ve gotten quite a few questions about the latest pitch from Ian Wyatt for his $100K Portfolio newsletter — this is his letter that tracks the trades of a $100,000 real money portfolio of his own money, started up a couple years ago when every newsletter publisher was trying out a “real money” letter.
I first covered a teaser pitch from this newsletter in the Spring of 2012, I think, though it could have been publishing for a while before that — during that time we’ve covered his teasers for one spectacular pick (TSLA, up 300% or so since last Spring’s tease), one good one (GLW, up 35% in 20 months), and one bad one … so of course, the bad one is the one of those that I actually own as well (Sandstorm Gold, SAND, down about 25%). I don’t know what the actual performance of his portfolio is, he’s not tracked by Hulbert and the teaser picks for his other services over the years seem to average out to, well, pretty average.
But we’re not asking you to subscribe to his letter, of course, we’re just asking you if you’re interested in finding out about this “Stealth Retail King of 2014″ that he’s teasing as one of his top picks for the year to come.And of course, we’ll ask for nothing in return other than your attention, and a bit of patience as you sit through my blatherations.
Though if you feel the urge to join our group of premium members, the Irregulars, well…
… it so happens that we charge exactly the same amount as Mr. Wyatt for that membership ($49 a year), and perhaps the most-loved part of our service is the little box on the left that gives you the details without reading through my blather.
But on to the topic at hand: Wyatt’s spiel now is that he’s got a talent for finding “Boomerang” stocks — and the opening attention grabber is that he buys stocks that are either undiscovered or beaten down at a 50% discount.
Here’s how the pitch opens:
“The Secret to Bagging a 399% ‘Boomerang Payday’!
“While almost no one was looking, Ian Wyatt and his readers have amassed extraordinary gains from some of the market’s biggest success stories. Shares have rocketed UP as much as: +151% on Howard Hughes Corp. (HHC)… +245% on Mastercard Inc. (MA)… +403% Tesla (TSLA)… and +399% on Netflix (NFLX).”
So yes, I can verify that he did pick TSLA last Spring, at a time when the stock was heavily shorted and under $40 and there were questions about whether they would hit their production levels for the year (the Model S was still just ramping up to full production capacity), and it did almost hit $200 a few months later and is still a huge win for him at $140+. And, of course, I looked at it at the time, didn’t assign much weighting to Elon Musk’s magic touch, and wished Tesla well but said there was no way I could pay that much for the stock. Not that I’m bitter or anything.
What’s Wyatt’s pick now? In his words:
“It’s time to pull back the veil on potentially my BIGGEST blockbuster of 2014.
“The stock I’m going to tell you about is one of those classic ‘boomerang’ investments … the opportunity to buy a world-class organization for a whopping 50% off its true market value.
“These opportunities don’t come along often, and when they do, you need to act quickly. Now is that time.
“Today marks a break with tradition. Right now, our portfolio has zero exposure to the retail sector. That’s about to change….”
OK, so it’s a pick in the retail sector — an area where I’ve personally tended to treat lightly because of the cyclicality, the pressures from Amazon and other online competitors, the low margins, and, in some sectors, the dependence on making good calls about fashion or trends. But it’s also an area that has bred some hugely successful stocks — if you get a hot retail name right, whether in fashion or food, you can do awfully well.
So which retailer is it?
“Today I introduce you to what could be the MOST UNDERVALUED STOCK in the entire ‘bricks and mortar’ retail industry. And it’s the perfect play for the ongoing U.S. retail recovery.
“I call it my ‘Stealth Retail King of 2014’. Before you dive in, please understand…
“It hasn’t all been smooth sailing for my new pick. They’ve experienced a few bad quarters – and haven’t yet witnessed the kind of share price appreciation enjoyed by many of their peers. But they’re turning it around fast… growing revenues and stockpiling cash.
“And there’s a heck of a lot more to like…
“This small ($2.7 billion market cap) women’s apparel company has very humble beginnings.
“The Stealth Retail King was founded in 1983 as a tiny boutique selling Mexican folk art and cotton sweaters on Florida’s Sanibel Island. Customers loved their brand so much that the owners decided to national.
“Fast forward to today. They operate 1,427 stores coast-to-coast promoting four superior brands geared to ladies ages 30-65. Each brand publishes its own monthly catalog and has its own website.”
OK, that’s starting to sound a little familiar — if I’m right, this is a stock that might have had humble beginnings but had some hugely spectacular “middles” and was the best-performing stock in the country for a decade or so. Let’s check the other clues just to be sure I’m right:
“The company reported sales of $751 per square foot in its most recent quarter – DOUBLE the per-square-foot sales at Talbots, Ann Taylor (NYSE: ANN) and Coldwater Creek (NASDAQ: CWTR).
“Even more impressive is its virtually spotless balance sheet. The company has $302 million in cash… is on track to have $370 million by year’s end… and has ZERO debt.”
Well, he would have had to pick this a month or two ago for it to be down 6% on the year, since it’s now pretty much flat over the last 12 months … and the store number is a bit out of date, but is an exact match for the number that was widely reported as their total over the Summer … and the quarterly numbers like the sales per square foot and the balance sheet are from the July quarter, not the most recent October one … but yes, this is Chico’s (CHS).
Chico’s FAS is a private label women’s fashion retailer, and for much of the 1990s and early 2000s it was the most successful retailing stock in the country (and one of the best performing stocks of any sector) as it grew tremendously on the back of the mass rollout of the Chico’s brand across the country. They earned a valuation commensurate with that growth back in 2005 and 2006, getting up to over $40 a share at one point on enthusiasm that their acquisition of White House Black Market would let their merchandising geniuses capture lightning in a bottle once again, and that they would be able to roll out their new Soma intimates brand as a “Victoria’s Secret for grown-ups” to great success as well … but then some merchandising and fashion mistakes hit and the stock fell pretty hard to the low teens in 2007, then further down to just below $2 a share during the depths of the financial crisis. So that’s the cautionary tale of what can happen to a growth darling when the growth part withers for even a quarter or two, but what’s the picture now?
Well, it’s more or less the same — they are now pushing gradually into international expansion, Chico’s is still the dominant brand in their stable and White House Black Market (which has a somewhat younger demographic) is still the faster-growing part, but in the years since Soma has indeed expanded to have it’s own substantial retail presence with more than 200 stores, and they’ve also added another brand, buying the Boston Proper brand and planning to turn that catalog concept into their next “bricks and mortar” chain (Boston Proper does have a few boutiques already — though they’re all in Florida and nowhere near Boston).
And the cash may not have hit $370+ million at the end of the year as Wyatt teased, since the cash balance was down to about $250 million as of the last quarter, though I imagine that’s partly because of inventory buildup at the holiday season and their ongoing share buyback program. We won’t really know for a while, their quarter ends at the end of this month and they won’t report again until late February.
They did announce that they bought back a lot of stock in the fourth quarter, and that the board has issued a new share buyback authorization which, along with a substantial increase in the dividend in November at their last quarterly report, has helped to encourage shareholders and drive the price up from the mid-teens to $19+ as I type. That’s despite the fact that that quarter was the third in a row of earnings that failed to meet analyst estimates even before taking into account a substantial writedown of the value of their Boston Proper investment because of faltering sales at the catalog (they bought Boston Proper in 2011, and had to write down the value this quarter because falling sales meant the brand was worth less than the value it originally carried on their books at acquisition — it’s not a cash cost, but it is an accounting cost that eats into reported earnings).
Why does Wyatt think it looks good here? Here’s how he put it in the teaser pitch?
“… they missed a few earnings targets and paid a huge price.
“The stock is actually DOWN 6% year to date.
“But that’s great news for us. See what Mr. Market did? He handed us a prime buying opportunity… at a deep-discount price… in one of the fastest-growing American industries!
“By virtually every measure, the Stealth King is a bargain.
“It trades at just 5.8 times EBITDA. And it trades at just one time this year’s projected revenue of $2.7 billion.”
At $19 a share, it’s trading for more like 6X EBITDA (that’s using enterprise value, which backs out the cash balance), which is pretty reasonable for a company that’s doing well at returning cash to shareholders and is expected (by analysts) to grow earnings by about 20% in the next fiscal year (the one that starts in February).
And then there’s a possible catalyst, according to Wyatt:
“There’s one more angle at play here. One that could trump all other growth triggers…
“It concerns the Retail King’s CEO.
“He’s has a 20+ year track record of success in retail. He was president and CEO of Tommy Hilfiger Corporation, president and CEO of Lands End, executive vice president at Sears, acting president of the J. Crew Catalog, and president and COO of the Home Shopping Network….
“Tommy Hilfiger and Lands End were his most recent stints. Both these companies were bought out with him at the helm.
“Given his track record, I am speculating he may be positioning to ‘flip’ his current company.
“It’s certainly an attractive target. Strong free cash flow, zero debt and huge growth opportunities both in the USA and abroad. It’s modest size is another plus.
“‘Those are things that private equity appreciates,’ Rick Snyder, a New York-based analyst at Maxim Group, said in a recent interview with Bloomberg. ‘(He) was CEO at two companies that were sold. People connect those dots.’”
So yes, that’s all true — Land’s End was (surprisingly) bought by Sears in 2002 after David Dyer had been CEO for about four years, it didn’t work out particularly well for either brand and Land’s End is probably going to be spun out again as Eddie Lampert continues to milk the carcass of Sears, but Sears did pay a nice 20% premium for Land’s End shares way back when. Tommy Hilfiger was sold to a private equity firm a couple years after Dyer took the helm, and garnered only a 5% premium to the share price at the time (though folks knew it was likely to be sold, so the price was probably already a premium before that). You can see that Bloomberg article speculating on the takeover possibilities at Chico’s here, it’s from October.
And Chico’s would make a pretty good private equity target if only because they carry no debt — so a leveraged buyout firm could acquire the stock, load them up with tons of debt in a big expansion spree to drive up revenue, and then sell the company off before the pressure from that debt comes to bear. Not that anyone would do anything so cynical, of course, not on Wall Street. They’re already doing a decent job of controlling their costs and returning cash to shareholders, and current activist shareholders like Blue Harbour think they’re a “growth stock trading as a value stock” — Irregulars might remember that Blue Harbour’s ardent enthusiasm for CHS was publicized during the Value Investing Congress back in September, perhaps Ian Wyatt was there at the same time I was.
CHS is up a bit since then, but only about 15% or so, so if you find that argument appealing it should still be so. I am personally quite cautious about the plans to roll out Boston Proper into a new bricks and mortar brand, but Chico’s stores seem to be enduring and White House Black Market and Soma are still growing pretty nicely, so there’s a lot to like about their growth and cash generation potential if you can look past the relatively weak “E” in the P/E multiple at the moment that makes the stock look expensive … but it’s still a retailer, so don’t lose sight of the fact that even though they’re returning cash to shareholders and are expected to grow they can still suffer at the whims of fashion or weather. And if they do again fail to reach analyst estimates next quarter that will mean four quarters in a row of disappointing earnings — that’s almost never a good thing, even if it could all be erased if someone decides to buy them out or it turns out that their holiday quarter was a smashing success (they were reportedly doing heavy discounting at the Chico’s stores according to some retail analysts, and it was a tough shortened holiday season for many retailers).
So there you have it — interested in Chico’s as the “stealth retail king” poised for a “boomerang” in 2014, or think the possibilities are already baked in? Let us know with a comment below.