Lands End ticker symbol (LE) has been selling clothes for decades. I remember distinctly the catalogs they mailed out in the 90s. I may have even had a jacket or shirt I got from Lands End back then. Not long ago the company was spun off from Sears. The apparel industry is a highly competitive industry. They have been around in one form or another since the 1960s no less. The company was founded in 1963 by Gary Comer in Chicago. They started out selling sailboat equipment. I imagine they will be around in another decade.
The first thing I noticed about Lands End currently is the price to earnings multiple is pretty low. The PE is 15. The very next thing I did is look at the yearly cash flow statement. There was $211 million in cash flow from operating activities. There was $16 million in capital expenditures. I take 211 minus 16 and we get $195 million in free cash flow. Free cash flow is the money the company has left over after it pays bills. They can either re-invest it in the business or return money to shareholders. It is always good to see robust free cash flow numbers. I'm about to run one more calculation and we are about to discover just how cheap Lands End really is.
The market cap of the company currently is $762 million. That number divided by the $195 in free cash flow give us a price to free cash flow multiple of 3.9. So the price to free cash flow of Lands End is about 4. Wow! Just wow. That is a super low multiple for a company like this. A lot of investors will actually put a lot more weight on cash flow figures. Some people run extensive spreadsheets that do discount free cash flow projections. With these kind of low valuations I wouldn't be surprised if a Lands End file isn't being emailed around the office of some private equity or one of Lands Ends competitors. I'm not saying there is or will be I just could imagine it.
So I saw this valuation and kept looking around the financials expecting to see a company on the brink of destruction. Earnings are down recently and earnings guidance is down from $2.00 to $1.46 per share. Pretty bad but how bad? I looked at the income statement again. I looked at sales over the past couple years. The past couple of years had flat sales growth. Sales were almost exactly the same as last year. Net income is flat too. This isn't great but they are holding in there. It's almost a billion dollar company too. It's harder to grow sales fast at giant companies.
I read about their customer base. "We believe our customer base consists primarily of affluent, college-educated, professional and style-conscious women and men. In fiscal 2014 our customers had average household income of $105,000 and approximately 42% of our customers were within the 35-54 age group. "
Looking at more valuations and ratios we have a price to sales ratio of .48. Obsurd. We have return on equity of 17%. A return on equity over 10% is very good. Pushing 20% we have a one of a kind golden business. If they can do 17% ROE in a mediocre year they can do 19-20%. A solid return on equity is meaningless, however, if low debt levels are not maintained. You will see high ROE numbers in a lot of industries like auto's and manufacturing but they blow up huge debt bubbles. Lands End's liabilities are stable. Long-term debt is actually down some even this quarter. Long-term debt is down $4 million since Aug 2014. They do carry a lot of debt with debt to equity around 1 but this debt is manageable. Lands End also has $181 million in cash on the balance sheet.
Trying to do a relative valuation is a little pointless. Some companies in this industry do well and have high valuations. Some do poorly and have low valuations. The industry is so competitive I'm not sure looking at other companies helps. I looked at a few though. Companies doing well like Under Armour (UA) has a PE ratio of 90! It has a price to sales ratio of 6. I think Columbia Sportswear (COLM) is pretty apples to apples with Lands End. Columbia has a price to sales ratio of 2 and PE ratio of 30.
The bottom line is will these bad results Lands End has been experiencing lately with sales continue? I don't think the valuation makes since. If sales improve just marginally the valuation could be 20,25 times earnings easily. This is the kind of company that can fetch a 20 PE in a bull market easily. So the way I look at it is over the next few years if things are going well for the company earnings could be $2.00 a share. The stock could be $40 to $50 a share and the compounded yearly return from the current stock price of $23 to $40 or $50 is worth it. There is a brand "moat" in this one and I see them defending the castle through this battle.
August 6, 2015
August 4, 2015
Net Net SORL Is Cheap
I've made a couple posts on SORL Auto Parts over the past couple of years. Nothing has changed much with the companies long-term fundamentals. The only thing that has changed significantly is the stock price. It's net current asset value has actually increased from 2013 when it was $124 million and 2014's of $129 million. Right now $141.7 is the net current asset value of SORL. It still sells brakes and auto parts in China. It's a major player in commercial brakes. What I didn't realize about SORL before is how diversified it is internationally. 73% of its business is in China but 27% is international in 104 countries including the United States, UAE and Europe. I'm always skeptical of Chinese companies so I looked around to see if I could find info on where they are sold in the US. I didn't see anything which likely is because they are sold directly wholesale to big companies with commercial trucks. I did find some parts on Alibaba.
The stock is cheaper relative to NCAV than in 2013 with the market cap back at $50 million, NCAV at $141 million and the stock at 2.72. It is priced at 36% of net current asset value. I do believe this would even meet Benjamin Graham's margin of safety requirement! Sales have grown steadily every year since atleast as far back as 2012. Yet the current price to sales multiple is .23. Below 1 is low for about any decent company. The company is profitable yet the PE ratio is 3. On the balance sheet the current ratio is 3.6. Healthy. A cool $18 million in free cash flow in 2014.
I'm very bullish on China over the long-term and I would expect this correction currently going on in the overall China market to end sooner than later. The current PE multiple on the stocks in FXI is around 10-11. If you can get major Chinese companies for single digit PE's that is cheap. Not to mention some dividend yield too. SORL has a lot of support until 2.50. I think the fundamentals make it a compelling buy here.
The stock is cheaper relative to NCAV than in 2013 with the market cap back at $50 million, NCAV at $141 million and the stock at 2.72. It is priced at 36% of net current asset value. I do believe this would even meet Benjamin Graham's margin of safety requirement! Sales have grown steadily every year since atleast as far back as 2012. Yet the current price to sales multiple is .23. Below 1 is low for about any decent company. The company is profitable yet the PE ratio is 3. On the balance sheet the current ratio is 3.6. Healthy. A cool $18 million in free cash flow in 2014.
I'm very bullish on China over the long-term and I would expect this correction currently going on in the overall China market to end sooner than later. The current PE multiple on the stocks in FXI is around 10-11. If you can get major Chinese companies for single digit PE's that is cheap. Not to mention some dividend yield too. SORL has a lot of support until 2.50. I think the fundamentals make it a compelling buy here.
July 21, 2015
The Economy and a Look At Major Indices
The dust is settling around the technology giants like Amazon and Google runs. So let's see what we have going on in the major indices. Let's take a peek at the Baltic Dry Index too.
I was listening to a radio program the other day and the guest was a perma-doom and gloomer. The only bad thing he could come up with on the economy was that commodity prices are falling. He said the recent weakness in oil and copper are leading indicators of growth. He failed to comprehend that oil is traded in US Dollars globally and pretty much all of any particular commodities movement is directly inverse of the dollar. Yes, the dollar is rebounding lately. So there you have the reason commodities are falling off. I suspect the strength of the dollar is on the back of the FED's latest news on rates.
The recent gains put up on the Nasdaq Index are looking like the index is in need of a cooling off. Looking pretty overbought. Especially in RSI 2. Biotech IBB is overbought as well. On the other indices like the S&P we are at resistance levels. Small-caps (Russell 2000) are not even running much nor bullish looking. Something has got to give on these indices because they will mimic each other eventually. This is because they are mostly determined by futures contracts. Yes futures contracts control the market.
Let's look at some charts. First is the Nasdaq itself. Looking very overbought. Vertical actually!! Needs to settle down. Doji candle printed today. Another trend reversal indicator. I circled the RSI and doji.
Biotech IBB is pretty much an identical chart except it has broken out a little more and is hanging even more overextended. It's such a bullish chart breakout though I don't know how much of a pull-back it will see. Same goes for the Nasdaq. I very well could be wrong and everything rips higher. Technically everything looks due for a pause atleast.
The Baltic Dry Index is running lately. I'm not convinced it is going to continue as it has had similar runs and corrections on trend. The trend is down. This could be the top of the downtrend as I drew on the chart below. We shall see shortly.
I was listening to a radio program the other day and the guest was a perma-doom and gloomer. The only bad thing he could come up with on the economy was that commodity prices are falling. He said the recent weakness in oil and copper are leading indicators of growth. He failed to comprehend that oil is traded in US Dollars globally and pretty much all of any particular commodities movement is directly inverse of the dollar. Yes, the dollar is rebounding lately. So there you have the reason commodities are falling off. I suspect the strength of the dollar is on the back of the FED's latest news on rates.
The recent gains put up on the Nasdaq Index are looking like the index is in need of a cooling off. Looking pretty overbought. Especially in RSI 2. Biotech IBB is overbought as well. On the other indices like the S&P we are at resistance levels. Small-caps (Russell 2000) are not even running much nor bullish looking. Something has got to give on these indices because they will mimic each other eventually. This is because they are mostly determined by futures contracts. Yes futures contracts control the market.
Let's look at some charts. First is the Nasdaq itself. Looking very overbought. Vertical actually!! Needs to settle down. Doji candle printed today. Another trend reversal indicator. I circled the RSI and doji.
Biotech IBB is pretty much an identical chart except it has broken out a little more and is hanging even more overextended. It's such a bullish chart breakout though I don't know how much of a pull-back it will see. Same goes for the Nasdaq. I very well could be wrong and everything rips higher. Technically everything looks due for a pause atleast.
The Baltic Dry Index is running lately. I'm not convinced it is going to continue as it has had similar runs and corrections on trend. The trend is down. This could be the top of the downtrend as I drew on the chart below. We shall see shortly.
July 14, 2015
Two Veterinary Stocks, WOOF and PETS
Vet Stocks are Must for a Portfolio
I grew up with cats in the house. When I was five or six years old I got a cat. I was going to name the cat Garfield but it turned out not to be a male. Ms. Garfield was debated. Name plans blown we called her Princess. My sister got a cat named Midnight later as well. I had a roommate who had a Jack Russell Terrier too. I never really thought much about veterinary hospitals and practices as a big business until I started paying my recently rescued cats bills.
Last Fall I rescued a kitten from behind a shopping center. She was just walking around all by herself meowing at me. She was only about 2 months old so I took her in. I took her to a veterinary practice just a half mile from my place. It's called a vet hospital but they do routine appointments. My little kitten Precious was healthy. She had some eye and nose crusting we figured were just allergies. Maybe a couple months later she exhibited some symptoms of a urinary tract infection. My ex-girlfriend took her to the vet and yep she had a UTI. She had an eye infection too. Twelve or fourteen days of Amoxicillin later she was cured. A few weeks ago she got another infection and thankfully after yet another round of antibiotics she is fine again. Her allergy symptoms are almost all gone as well after I gave her antibiotic drops in her nose.
After all of those appointments and treatments I realized having a pet can almost be as expensive as having a kid at times. I knew this before I got the cat of course but it finally hit home. We love our pets almost like children. I did some research on pet spending and not surprisingly Americans spend steadily on their pets. About three-quarters of Americans have pets. This is a huge business. Americans spent $61 billion on their pets in 2011. The BLS government statistics on this are pretty astounding. Take a look at the full article here. Some of the interesting points are as follows.
In 2011, households spent more on their pets annually than they spent on alcohol ($456), residential landline phone bills ($381), or men and boys clothing ($404).
Despite the recession, families continued to spend consistently on their pets between 2007 and 2011. Spending on pets stayed close to 1 percent of total expenditures per household, despite the recession that occurred during this time.
Spending on pet food stayed constant or increased during the recession, even while spending at restaurants fell. Married couples without children living at home spent the most on their pets out of any household configuration in 2011.
So not only were pet companies a recession beater they are a baby boomer play also. In my quest for public pet companies I have fallen for two stocks I'd like to take home. The first one is VCA Inc.(WOOF). WOOF has 643 animal hospitals in the US and Canada. It is a $4 billion company. It has a solid balance sheet, good profit margins and growing free cash flow. Return on equity is 11%. Forward PE is 21. The stock has been on a run and just broke out to a new high yesterday.
The second stock is Petmed Express (PETS). PETS is a much smaller company with a market cap of just $370 million. They sell prescription drugs and pet supplies. PETS has similar healthy margins like WOOF. Net profit margin is 7.6%. Much better than WOOF PETS sports a whopping 23% return on equity and 22% return on assets! These are return on equity numbers that would make even Warren Buffet do a double take. This company has an incredible balance sheet with zero long-term debt. Solid free cash flow is there and to boot the company pays a big dividend. The dividend yield is 4%. The stock is also hitting fresh highs over $18 a share now. As I've made the case pet stocks are a must for a portfolio.
full disclosure: no current position in WOOF or PETS but am looking to buy both.
I grew up with cats in the house. When I was five or six years old I got a cat. I was going to name the cat Garfield but it turned out not to be a male. Ms. Garfield was debated. Name plans blown we called her Princess. My sister got a cat named Midnight later as well. I had a roommate who had a Jack Russell Terrier too. I never really thought much about veterinary hospitals and practices as a big business until I started paying my recently rescued cats bills.
Last Fall I rescued a kitten from behind a shopping center. She was just walking around all by herself meowing at me. She was only about 2 months old so I took her in. I took her to a veterinary practice just a half mile from my place. It's called a vet hospital but they do routine appointments. My little kitten Precious was healthy. She had some eye and nose crusting we figured were just allergies. Maybe a couple months later she exhibited some symptoms of a urinary tract infection. My ex-girlfriend took her to the vet and yep she had a UTI. She had an eye infection too. Twelve or fourteen days of Amoxicillin later she was cured. A few weeks ago she got another infection and thankfully after yet another round of antibiotics she is fine again. Her allergy symptoms are almost all gone as well after I gave her antibiotic drops in her nose.
After all of those appointments and treatments I realized having a pet can almost be as expensive as having a kid at times. I knew this before I got the cat of course but it finally hit home. We love our pets almost like children. I did some research on pet spending and not surprisingly Americans spend steadily on their pets. About three-quarters of Americans have pets. This is a huge business. Americans spent $61 billion on their pets in 2011. The BLS government statistics on this are pretty astounding. Take a look at the full article here. Some of the interesting points are as follows.
In 2011, households spent more on their pets annually than they spent on alcohol ($456), residential landline phone bills ($381), or men and boys clothing ($404).
Despite the recession, families continued to spend consistently on their pets between 2007 and 2011. Spending on pets stayed close to 1 percent of total expenditures per household, despite the recession that occurred during this time.
Spending on pet food stayed constant or increased during the recession, even while spending at restaurants fell. Married couples without children living at home spent the most on their pets out of any household configuration in 2011.
So not only were pet companies a recession beater they are a baby boomer play also. In my quest for public pet companies I have fallen for two stocks I'd like to take home. The first one is VCA Inc.(WOOF). WOOF has 643 animal hospitals in the US and Canada. It is a $4 billion company. It has a solid balance sheet, good profit margins and growing free cash flow. Return on equity is 11%. Forward PE is 21. The stock has been on a run and just broke out to a new high yesterday.
The second stock is Petmed Express (PETS). PETS is a much smaller company with a market cap of just $370 million. They sell prescription drugs and pet supplies. PETS has similar healthy margins like WOOF. Net profit margin is 7.6%. Much better than WOOF PETS sports a whopping 23% return on equity and 22% return on assets! These are return on equity numbers that would make even Warren Buffet do a double take. This company has an incredible balance sheet with zero long-term debt. Solid free cash flow is there and to boot the company pays a big dividend. The dividend yield is 4%. The stock is also hitting fresh highs over $18 a share now. As I've made the case pet stocks are a must for a portfolio.
full disclosure: no current position in WOOF or PETS but am looking to buy both.
July 7, 2015
Chinese Stocks Are Not Crashing
I keep hearing on CNBC that China is crashing. Every day there is talk about how urgent the situation is. Let's refute this idea with some facts. First of all the current price to earnings ratio (PE ratio) of the I-Shares China 25 Index is a whopping 12. Yes, a PE of 12. A PE in the teens is not high for the largest companies in China let alone any stock of index. Around the high this year it was closer to 20. Still no bubble territory. In the 2007 Chinese crash the PE of FXI was closer to 40 than the teens.
In the 2007 crash there was a double top formation. There isn't a bearish chart formation here. The current chart of the China 25 FXI is actually bullish. The first chart below is the most recent trend line. It is being tested right now. The second chart is a long-term chart of FXI which shows the long trading range it was stuck in for years. It finally broke out of this range which is bullish. It just broke out this year. This is not a parabolic move to the upside. We finally just hit some highs! The red line on the top is the top of the trading range. The red line on the bottom shows the uptrend. If the index falls to the low 30s we are closer to a crash. A crash would be if the upper 20s get taken out.
In the 2007 crash there was a double top formation. There isn't a bearish chart formation here. The current chart of the China 25 FXI is actually bullish. The first chart below is the most recent trend line. It is being tested right now. The second chart is a long-term chart of FXI which shows the long trading range it was stuck in for years. It finally broke out of this range which is bullish. It just broke out this year. This is not a parabolic move to the upside. We finally just hit some highs! The red line on the top is the top of the trading range. The red line on the bottom shows the uptrend. If the index falls to the low 30s we are closer to a crash. A crash would be if the upper 20s get taken out.
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