Another kind of value stock

I’m travelling again but this time for pleasure on a river cruise in Russia. So this will be my only blog for this weekend.


While the market was indeed in quite a turmoil this week as I was expecting, I thought the last couple of days should be better after the initial harsh drop early this week. But apparently Mr. Market couldn't hold up well when there was constantly negative news to push it down. However, technically it is still not too bad and more bullish than bearish if you ask me and I still think we will likely see 3020 again soon before more severe plunges. One more thing, oil is on the verge of a big move again and I bet it is more likely towards the up than down, after a quite good dose of correction since the last jump.  

Now the main theme for this blog, the value investment. When we talk about value stocks, usually we will only be interested in those with stable business which will still be doing fine in the long run even with new challenges down the road. Today’s idea does not fit into this category. Actually it may not even be available  for investing publically in the near future if my prediction is correct. That’s why it is an out of box kind of thinking that make me interested in it. Let me explain.

As I wrote many times before, the Bricks and Mortar retailers are trending down big time in facing the e-commerce competition lead by Amazon. With very few exceptions, nearly all the BM retailer businesses have been decimated in the past few years, including major bankruptcies like the toy giant R-Us. The company I’m talking about is also a retail giant with a glory 50 years of history, an icon name in the US. But apparently it hasn’t effectively overcome the challenges by the e-commerce and is trending down as well big time. It is a household name and everyone knows it, the famous GAP store (GPS). Following the 2008 financial crisis, it had recovered quite well with a 4+ times gain within 5 years from $10 to about $45 by 2014. Then its good time has faded quickly with increasing competition by Amazon and other online retailers. It has lost most of its earlier gain and currently it is trading around $17. The common view for GAP is overwhelmingly bearish apparently but I have a different view for it at this price. I think GAP has a good value now regardless how you look at it. Here are a few rationale why I’m thinking so.

• First of all, GAP is very cheap at this price, with a PE only about 7 and a dividend about 6%. While it is facing significant challenges, it’s still generating good free cash flow, nearly $700 million in 2019. Its debt load is not out of whack as many other heavily debted companies and its strong free cash flow can easily severe its debt. This is one major concern for retailers now as uncontrollable debt load can easily kill a company!
• GAP has many great brands including Athleta, Banana Republic, Gap, Hill City, Intermix, and famous Old Navy. These are still the brands loved by Americans and that’s why it can still generate good cash flow. The coming shopping season for the X’mas should be great for these brands and ultimately for GAP!
• The company is highly owned by insiders, especially the founder, the Fisher family. The insider ownership is as high as 36%, in which 60% of it is owned by the Fisher family. When insiders are heavily owning a stock, you can bet they have the same vested interest as other shareholders and they will do whatever they can to boost its share values. One thing we know GAP is going to do to increase the share value is its plan to spin off its high-performing brand,  Old Navy. This will come next year and the Street loves this kind of thing and likely will boost the stock price as well.
• Conversely there is a quite high short floating rate, over 16%. This is a contrarian indicator which suggests how much herd hates the stock and bearish on it. But this may easily trigger a short squeeze when the stock moves up against them. I think anyone heavily shorting GAP at this price will pay a high price sooner or later.
• Last but not least, there is a speculation that GAP may seek private equity to be bought out and privatized. This makes a lot of sense with so many great and performing brands as well as good valuation at the moment. It will certainly be the interest for the Fisher family and the insider owners such as the company executives, who will greatly be benefited if such a deal is materialized. If this happens, typically we may see a 50% or even higher premium over the market price, which means we can easily see something around $30 or higher stock prices if we buy it at the current price.

No guarantee of course for what I’m saying here but believe or not, its TA appears to also suggest GAP is bottoming now and is ready to move up. I want to be in when everyone else is looking down at it. That’s how a contrarian should do.