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Contra the Heard is a quarterly publication, but we keep our clients apprised of our most recent moves via email. This is a very important part of our service that enables our readers to closely follow all of our buy and sell decisions. We also issue an update when there is takeover activity with one of our stocks.
Here is a sample of a release that went to our readers:
CONTRA THE HEARD
(Last update: December 7, 2018)
Update December 10, 2018
NASDAQ Buy: Hibbett Sports Inc. (HIBB)
When Phil started to research US retailers a few years ago, Guess? And Hibbett were two names that piqued his interest. GES has been in the VPP since December 2016 and done exceedingly well, but Hibbett is probably an unknown name to Contra subscribers. The company is a sporting goods retailer which focuses on footwear and sports apparel and equipment. These segments respectively accounted for 55, 28, and 17 percent of sales in the last fiscal year. The organization locates stores in small- and mid-sized US communities in malls anchored by tenants such as Wal-Mart. Geographically, its stores cover 35 states but are focused primarily in Texas and south-east states such as Georgia, Alabama, and Florida.
Having followed this company for a long time, it appears the current price presents a good entry point. Tax loss selling is in full swing, the stock market is falling, and HIBB shares are getting hammered. As a result, the stock is trading at its lowest valuation over the past decade, including price ratios for sales, book value, earnings, and cash flow. We like investing in profitable companies trading below book, especially when they also have an enterprise value/EBITDA ratio under 5. Better yet, Hibbett has these metrics without a balance sheet fluffed up with goodwill. The company has nominal debt, a net cash position of nearly $120 million, and its current assets exceed all liabilities by better than two to one. This will change slightly given a recent acquisition. It is also what Charlie Munger calls a "cannibal" as it engages in a meaningful and regular share buyback. Over the last decade the share count has fallen from 29 million to 19 million shares.
The business plan and strategy are also atypical. Operating in underserved small and mid-sized communities means they are in niche markets. There are 1,042 stores, of which 281 operate in towns with no competition and 546 operate with only one other sports retailer. This outfit also operates in states with low minimum wages and weak union laws. Though they only started selling online in mid-2017, they have caught up fast and 8.8 percent of sales came from online in the latest quarter.
As with all opportunities however there are warts and worries. Insiders have been net sellers over the last twelve months and own only one percent of shares. In the latest quarter, management reduced full year guidance meaning annual EPS is now expected to fall to its lowest level since 2010. Back in 2013 margins used to be in the high single digits but today they are in the low single digits. Part of this fall in profitability has to do with the Amazon tsunami but another has to do with its dependence on suppliers. Nike, Under Armor, and ADIDAS account for the lion´s share of HIBB´s inventory and those big boys have pricing clout. With competitive pricing pressures piling up, Hibbett is closing stores.
In an attempt to address declining profitability, management recently acquired a much smaller but rapidly growing and more profitable private retailer called City Gear for $88 million. City Gear operates in the US south-east, has 135 stores at strip-mall locations like HIBB, and generated $190 million in sales last year versus Hibbett´s $968 million. The transaction is expected to be competed this month and to be EPS accretive next year. While M&A never goes exactly according to plan, the strategic fit and rationale here appear to make sense.
CONTRA THE HEARD
(Last update: January 10, 2021)
Update January 11, 2021
NASDAQ Buy: Hibbett Sports Inc. (HIBB)
The final chunk of Hibbett in the VPP has been spun out at $55.50. All in all, this selection worked out well with percentage gains on each consecutive slice coming in at 190.1, 221.1, and 269.8. In the October 5 release we wrote, "With 70 percent off the table, we´re now being greedy with the remainder and are happy to hold it and see if HIBB can make a meaningful thrust over $50.00." Though it did briefly crest that mark in October, this rally has been fiercer.
As this stock has been so widely discussed, there is not much new information or insight to report here. The operation continues to do well thanks to the company´s digital shift, Nike´s supplier consolidation efforts, and the thinning of the brick-and-mortar competition. The next quarterly results should show a continuation of these trends and once again sport solid revenue growth with fat profit margins.
Despite the impressive operating results, HIBB is no longer cheap. The stock does not have nosebleed valuations by any means but calling it a value stock today would be farfetched. Investors can ponder how much this matters in the near term though as the momentum is strong and technical indicators point to the bulls being in full control. A case can be made for riding the tiger for further gains, but we are satisfied to lock in our profits.
This is a wacky time in the markets. Money is super cheap, assets of many types are inflating from cryptocurrencies to real estate to Tesla and the FAANG stocks. Maybe it should be FTAANG? Add in the proliferation of SPACs (special purpose acquisition companies) and day trading YouTube stars and it's all looking wildly speculative. Taking profits off the table in this environment warms the cockles of our hearts.
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