Apparel Retail: Catastrophe or Opportunity?

As those of you reading along know, I’ve been having trouble finding anything to get super excited about in this market. I like to buy things that are undervalued, and I just don’t see a lot of things that interest me. I’m mainly keeping an eye on companies that I like, waiting for the market to take a dive so I can swoop in with my large (percent wise) cash position and make out like a bandit. That’s the plan.

I’ve also been looking at companies that have not really participated in the recent good times on Wall Street. There are some parts of the market that have been downright horrible the past few months. I’ve been looking into clothing retailers, mainly department stores. I have a history in retail myself. I owned a large thrift store for nearly 10 years. Retail is a different animal than anything I’ve covered here on my blog before. Unfortunately, my little one shop operation doesn’t really give me a lot of insight on investing in large, publicly traded apparel companies. I never had to report same store sales to my (nonexistent) investors. I didn’t have to answer analyst questions on a quarterly conference call. What I did do was a lot of hard work. Which is also what I’ve been doing to get up to speed on investing in retail companies.

By now we’ve all heard about the ‘death of retail’. Amazon (NASDAQ: AMZN) is crushing traditional brick and mortar retailers. Malls are basically dead. People only go to stores to look at merchandise, maybe try it on, then order it (probably from Amazon) right from their smartphone before they get out the door. A lot of that is actually true, in my humble opinion. But I also believe that most forms of traditional retail are here to stay. And if that’s true, they are worth something.

Other than negative sentiment, I’m looking for safety. I’m generally looking for companies with stable balance sheets that pay nice dividends that aren’t going to be cut. One thing I’m learning is that most retail businesses don’t seem to keep a lot of cash on hand relative to their liabilities. That’s something that would usually bother me, but I guess that makes sense. Retailers use that cash to buy inventory, and rely on turning it for cashflow. So I’ll have to be a bit lax on that aspect of the balance sheet.

Another thing I’m looking for is an online presence to compete with Amazon. No small task, that. But EVERYONE has an online presence, so I’m looking for management that is taking it seriously.

One company that I’m interested in is DSW Inc. (NYSE: DSW), a shoe retailer. I’m already invested in Skechers (NYSE: SKX), which is a shoe retailer, but I consider them a shoe manufacturer first and foremost. Now before anyone gets the idea that I have some weird fascination with feet, let me tell you why I like the idea of a shoe retailer in this modern age. Who buys shoes online? Ok, a lot of people, my wife included. But, really? Unless I was going to order the EXACT same shoe from the same company, that I already knew fit, I would NEVER order a shoe online. I just can’t wrap my head around it. My wife probably gets around 50% of her shoes online, and has to return (or wants to but doesn’t because it’s too much of a hassle) about 1 in 4 of them. I honestly don’t understand that mindset, but whatever.

In early 2016 DSW bought Ebuys, an online footwear and accessories retailer. They offer hassle free returns at their 500 or so U.S. based DSW stores, as well as a successful ‘buy online, pickup at a store program’, which makes sense to me. Order online to get exactly what you want, go to the store to try it on, and if it isn’t what you want, BOOM, return it right there. And you happen to be in a shoe store, while you’re in the market for shoes… seems like a good idea to me. This company seems to have the online/brick and mortar thing figured out. They should complement and feed off of eachother.

DSW has had issues with same store sales lately, and they expect that problem to continue for the current quarter, though their revenues continue to grow. Their inventory numbers are also getting better, meaning they might not have to discount as aggressively going forward as they have in the recent past, which could mean better margins. The revenue growth seems to be coming from opening new stores, which I’m of 2 minds on. More stores is great if they work out, but right now closing stores seems to be in vogue for a lot of the bigger retailers, as we’ll see below. So it’s risky.

One thing I really like about DSW is the dividend, around 4%, and the fact that they’ve been buying back stock. The buybacks tell me that their dividend is pretty safe. Financially this company seems fine. While there are risks to the company’s strategy, I feel as though the negativity is overblown. I’m thinking of starting a position soon.

I’m also interested in Macy’s (NYSE: M). First of all, let me say that I REALLY dislike Macy’s. Pretty much every woman I’ve ever been involved with has dragged me through multiple Macy’s, multiple times. I’ve seen people accosted by perfume sprayers, and have often wondered how they can get away with that. Blatantly ridiculous, if you ask me. Macy’s is not my kind of shopping experience, but I’d be happy to make some money off the stock.

Macy’s has been experiencing sluggish sales and earnings the past few years, and has suffered from a disappointing holiday season. Same stores sales have been declining for seven straight quarters. The current big news is their plan to close 100 if its 870 stores, 68 of which have been identified. This of course involves the elimination of thousands of jobs. Macy’s will redirect effort and capital from these underperforming stores to better performing stores and their already successful online business.

Macy’s plans to open more Backstage stores (think discount) within existing stores, as well as BlueMercury beauty outlets. Another thing Macy’s has going for it is real estate ownership. Many investors are pushing for the company to spin-off the real estate holdings into a separate investment vehicle. The company has partnered with Brookfield Asset Management (NYSE: BAM) to look into their real estate options. I honestly don’t know if that is a good idea or not, but the fact that they own enough real estate for it to be an issue makes me feel good about the stock. Some of the locations that are closing will be sold, generating cash for the company.

Another good thing is that the stock offers around a 5% dividend that looks pretty safe, especially considering the upcoming real estate sales. There is also an ongoing stock buyback and talk about debt repurchases. Despite the company’s current problems, I don’t see any major financial issues cropping up.

2-2-17 UPDATE: The day after this post, I started a position in Macy’s at $28.84

I’m also keeping an eye on Kohl’s Corporation (NYSE: KSS). Much of what I’ve written about Macy’s is practically interchangeable with Kohl’s: similar stable dividend, nice buybacks, etc. Kohl’s doesn’t have the same real estate buzz, so the factors in play are different. Kohl’s is also closing stores, though not nearly as many as Macy’s. One thing I like about Kohl’s is their aggressive customer loyalty program. I’m more inclined to buy Macy’s at current prices, but KSS is one to watch.

There’s no question that traditional apparel retailers are up against a tech-savvy consumer with changing buying habits. Some won’t make the transition, some will. I believe that negative sentiment for the future of these 3 companies is overblown. Could it get more overblown? Sure. But I’ve listened to conference calls for each of them, and I don’t get any sense that these are doomed companies. All are relatively near points where I plan on starting to buy, but the key word here is ‘start’. I realize that they could continue to go down, at which point I will buy more. As with most of my purchases, my first buy is more or less 25% of a planned position; I’m giving myself room for more downside. I welcome it, in fact.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada

2016 in Review

I know we’re well over a week into the new year, so I may be a bit late for the traditional ‘year in review’ post, but as you might expect, the holidays are a hectic time in the casino bar biz. So after getting my butt kicked at work for a couple of weeks, I got a few extra days off. So here we are.

What was 2016 like for me, as an investor? It didn’t start off very well. February was my lowest point in this investing/blog project, down over $700. But overall the year was very good. Since that low, my profits more or less shot straight up for the rest of the year. I beat the market by a wide margin in 2016, which is even more impressive considering that I usually had more than 50% of my portfolio in cash. Toward the end of 2016 I got increasingly nervous about the market, selling many of my positions. I ended the year with about 75% cash, and even bought a few put options which I still own. Below I have a chart of all my current positions, and everything I sold in 2016. The charts are to the current date, so we can see if those sales were timed correctly or not. SPOILER: It’s a bit of a mixed bag, but I’m generally pretty happy. I’ve written a piece on most every company listed below, so I’m just hitting the highlights here.

 

CURRENT POSITIONS

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Here we have Chesapeake Energy (NYSE: CHK), the first thing I bought, and I’m still holding. I may be down 18%, but that’s nothing. At one point I was down about 83% on this. I can do 18% standing on my head. When CHK hit $1.50, being down 18% would have seemed like a distant fantasy. But as you can see, Chesapeake is clawing its way back. The company is slowly taking care of its debt problems, and I think the future of natural gas is bright. I’m holding this one long term. It may well go back down some before heading higher, but I’m a believer.

 

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8point3 Energy Partners (NASDAQ: CAFD) is a company I’m really excited about. I’m excited because it’s kinda boring. It owns solar projects and collects money from long term contracts on those projects. It plans to slowly grow its already nice dividend over time. I like the solar industry, and I plan on holding this a long time as well. In fact, I’ll own a lot more if the price goes significantly below my lowest buy point. If it hit single digits maybe?

 

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First Solar (NASDAQ: FSLR) is another solar company I am really excited about. I made money on it in 2015 and got back in when the price plummeted after I sold out. Well, it kept plummeting. I hope it plummets some more! Everyone seems to think 2017 will be a tough year for the solar industry, and that may be true, but FSLR has a great balance sheet and a management team willing to make tough, long-term decisions. I’m down now, but not worried one bit. People say a Trump presidency will be bad for the solar industry. I say bring on the negativity.

 

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Skechers (NYSE: SKX) shares were hit a few months ago on fears of slowing domestic growth. I love the shoes, and the company seems great as well. So far the timing of my first buy point seems really good, though as with most things I own, I’m willing to buy more if the price goes lower. I believe Skechers will continue to be a force in the shoe industry, and not a fad stock. Time will tell.

In late November I bought my first option for my investing/blog project. I bet against CSX (NASDAQ: CSX), a railroad company. The puts haven’t done much, but they are good until January, 2018.

 

POSITIONS CLOSED IN 2016

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PayPal (NASDAQ: PYPL) was a decent holding for me. I could have sold it for a bit more had I waited, but overall it hasn’t really done much since I sold it. I got out because I believed the market was overheated, though of course the market has risen quite a bit since I sold. I like the company, but obviously not at these levels.

 

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I’ve had several successes in 2016, more so than failures, but Energy Transfer Equity (NSYE: ETE) is what ensured that I beat the pants off the market even while usually maintaining over 50% of my portfolio in cash. When I sold at $18.25 and it went down to around $14 over the next couple of months, I was feeling pretty good. If I had stuck with it I’d have been even better off. I can’t complain.

 

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Ambarella (NASDAQ: AMBA) is perhaps my ‘best’ trade from a technical standpoint. My entry points were great, my exit was very timely, and the stock has been weak ever since. I certainly believe in the long term viability of this company, and am considering buying in again soon on any further weakness. This is another well managed company with a great balance sheet, and I think it’s worth owning long term.

 

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I’m going to give the ‘missed opportunity of the year’ award to Baker Hughes (NYSE: BHI). I never felt I understood this company in quite the way I understood my other investments. I think it’s because they didn’t have webcasted conference calls for awhile because of the proposed buyout from Halliburton (NYSE: HAL). Conference calls are so important to my understanding of a company. I liked the business they were in, I liked the money they were going to get from HAL if they didn’t get bought out, and I liked all of the negativity. I made a profit, but at the end of the day I simply didn’t understand things well enough to stay in, and got out too soon. Oh well, as far as mistakes go, I’ll take it.

 

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Speaking of mistakes, here’s one I’d rather have not made, although it wasn’t really that bad. Daktronics (NASDAQ: DAKT) makes large digital signs, stadium scoreboards, that sort of thing. This was an early pick of mine, but it slowly bled away after I bought it. The problem here was that this was such a small company that there really wasn’t much to keep track of. I go to several financial websites to keep track of articles about each of my positions, and all of the companies that I’m following. DAKT was such a small company that aside from a few dry newswire type reports, there was hardly ever anything being discussed or written about the company. I kept watching the price go down, and didn’t have a good understanding of why. So I sold for a loss, while I should have had faith in my original plan and bought more. It would have turned out very well. I want to invest more in small companies, so I have to work on a system to do that. Live and learn.

 

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Mattel (NASDAQ: MAT) is another position that looks pretty awesome from a technical standpoint. Mattel was struggling from revenue problems, especially in its Barbie line, and negativity had gotten overblown. I believed in the turnaround story and bought in. Pretty soon everyone and their brother seemed to believe in it as well, so I got out. It didn’t really do a lot for awhile after I sold, but it’s been in a slight downtrend for months. If it returns to the lows, I’d buy more. But I believe that at the current price, it’s overvalued. If it got much higher than where I sold it, I’d consider buying puts.

So that covers it for my 2016. The year gives me some confidence that how I do things works, but what about 2017? I’ll be honest, I’m nervous about this year. I don’t think things are as good as the market makes them out to be. People have asked me if the election changes my views on the market, and I’d have to say no, not really. I felt this way before the election, and I don’t think either possible outcome would have made me feel any different. The market seems to like the Trump win, and that’s fine. And while I know that there is a definite possibility that the market goes up from here, perhaps significantly over Dow 20,000 (as of this writing it’s ALMOST made it), I believe there is a significant correction coming sometime soon. When? Well, if I knew that I’d be dating a supermodel, probably several.

So how do I handle 2017? Simply sit on my cash like I seem to be doing now? Buy put options on everything and hope for a crash? That might turn out to be exactly right, who knows? My general plan is to be extremely cautious and only go long on stocks that are DEEP values, and buy a few long-term put options here and there on things I feel would be worst hit in a market downturn. Sounds simple right? I found myself in some pretty sweet deals in 2016, and it would be easy to look back and oversimplify them, or feel that I have the ‘golden touch’. Buy ETE at $6.75 and $4.85, then sell a few months later at $18.25, all while collecting a few dividend payments? Cake.

But I have to remember the hard work I put into understanding what I was getting into, and the sweat dripping off my brow as I bought things that were falling like rocks. I have to keep my perspective. If it were really that simple, then I have a fool’s luck to thank for my success in 2016. Rely on that, and it’s sure to run out.

As always, feel free to look at my portfolio and see how I’m doing. Usually I own or plan to own stock in many of the companies I write about. Specific numbers I reference may not be completely accurate; different online financial sources often have somewhat conflicting information. Verify information via multiple sources you trust. Please READ MY DISCLAIMER. Do not take action in the market simply because of what you read here. I write about what I am doing and what I think, I am not advising anyone to do anything. Make your own decisions, do your own research, and never rely on any single source for information. Some of my ‘picks’ and strategies WILL lose money, that’s the way the market works. I am not a financial professional; do not rely on me as such.

Thank you,

Michael, the Stock Picking Bartender,

Reno, Nevada