Bombay: Classic contrarian redemption

Benj Gallander and Ben Stadelmann
Saturday, May 3, 2003

Back in July 2000, we wrote in The Globe and Mail : “The retail sector has remained maligned, but as the belief that established ‘bricks and mortar’ have one foot in the grave recedes, some of these stocks should bask in a new-found glow. Our top pick in this sector, Bombay Company ….” At that time, the stock was trading at the $2.80 level. We did an update on the firm in a column in January of this year.

After three years of lots of nothing, trading in a range of $2 to $5, and lolling about supine in the $2 range as recently as last October, this operator of furniture stores finally started to move in November. The mighty surge continued, arriving at its current value of around $8.75. Can the altitude above $30, where it danced in 1994, be far off? Such pie in the sky would be most welcome, but is unlikely.

What caused this chain of 350-plus stores to break out? It’s not rocket science, exactly. In December, same-store sales jumped 18 percent, followed by consecutive monthly numbers of 27, 26 and 30 percent. This, in turn, is tickling the bottom line. This month’s quarterly loss is expected to be much less than originally projected, and the year-end numbers should be absolutely dandy.

Bombay is a classic example of a normal wave that occurs with many stocks. For years, the company improves operations, small step by small step, but the results are not evident on the profit side of the ledger. Then, suddenly, like a tangled pubescent who appears to magically regain his co-ordination with one inhalation, everything comes together and an investing public that avoided the corporation like a pandemic recognizes the transition and jumps on the bandwagon.

Our general rule at Contra is that we sell 50 to 100 percent of a position at our initial sell target, which in this case was $7.69. However, Bombay was surging so smartly that when this goal was passed, we gambled — yes mother, investing is a form of gambling — and let the whole enchilada ride. Less than two weeks later, at $8.44, 60 percent of our position was sold, with the other 40 percent tagged for a loftier target.

Where might that be? Hard to know. A couple of recent analyst upgrades have helped. Perhaps more are in the cards. We can’t expect a better appraisal from the debt gurus, as the balance sheet is as pristine as newly unfurled leaves — as it has been since our purchase.

Ultimately, this one will likely shoot forward based on the reinvigorated numbers. If it passes $10, there is the possibility of a gusher, as some institutions will get all hyped up to join the party. That would be major bonus, and in such happy circumstances we deploy the much-maligned technique of market timing, an approach we are not afraid to include in our arsenal.

When we first purchased Bombay in 1998 at $4.50, then averaged down at $3.63 in 2000, it appealed to us as value investors. During all the down days, we patiently stood firm. Our perseverance is now being amply rewarded.