Sometimes, You Just Have to 'Kick the Tires'By Berna Barshay  On Saturday, I wrote about the multi-bagger returns that Empire Investment Report subscribers have enjoyed in Citi Trends (CTRN)...
But there was one part of the story about the small-cap retailer that I didn't tell... When I met with newly appointed CEO David Makuen last January, I was immediately encouraged and excited that this sleepy, little-known stock that I had been following for years was finally setting up as a great investment. Makuen articulated compelling strategies for expanding into new product categories, in-store merchandising, and attracting new brands. It all sounded great... But if there's one thing that I've learned in my 20-plus years of listening to retail CEOs, it's that they're great talkers. Like many CEOs at retailers, Makuen has a marketing background. He had risen through the ranks by spinning stories. If he could create appealing narratives for shoppers and vendor partners, why couldn't he market his company and the opportunity ahead just as well? I've learned the hard way that retail is an exceptionally intense and pitfall-strewn business. It's easy to explain strategies that hit on all the business buzzwords of the day, but retail strategy isn't a one-size-fits-all proposition. And many leaders have great strategic ideas but fall down in the execution of them. In my meeting the prior January, Citi Trends' previous CEO outlined the many opportunities for the company to improve its store productivity. It sounded good in theory, but it was hard to judge if the opportunity was really there. However, I knew that CTRN shares were cheap – and even cheaper if the company could accelerate its growth. One of the ways I knew Makuen's vision made sense is that I had done what few potential investors in CTRN shares ever do... While I was at the conference, I looked up the store locations that I could visit upon my return to New York. Unfortunately, I found that the closest one to me was almost two hours away. However, there was one about a half hour away from the conference hotel, on the other side of Orlando. I quickly jumped in an Uber and headed there, despite my driver's attempts to talk me out of my destination. When I got there, he insisted on waiting for me because he thought I would have trouble getting a ride to pick me up later. I had only traveled about 20 miles from the Ritz-Carlton, but it felt like I was in a totally different city. While the location wasn't dangerous, it was the only place I've been in Orlando where I didn't see any Mickey Mouse merchandise being hawked. When I visited the Citi Trends store, I was able to see the potential to get more productivity out of it, as well as the moat of customer loyalty that the location appeared to have built. It checked out. While it would take a year before the new CEO would arrive and prove to be capable of executing, I needed to see it with my own eyes to know that the opportunity was real. In an ideal world, I would have visited a whole bunch of Citi Trends stores in different cities... but just that one visit gave me the confidence that this was a chain that could grow again, in the right hands. Given Citi Trends' concentration in the Southeast – and its lack of presence in the New York City metro area – I'd bet that the vast majority of investors in CTRN shares have never set foot inside a store. It's not that you can't make money investing in retailers without visiting stores. Of course you can. But it's much easier to identify inflection points, opportunities, and risks if you make those visits.
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Not every investment requires boots-on-the-ground research, but sometimes it can make a huge difference... With consumer products, an inherent part of buying a company's stock is the belief that its products will continue to be popular (if not become more popular). If you don't understand the products, how can you judge that their appeal will have legs? Of course, it's also important to realize that as an investor, you're not necessarily the target demographic for what you're checking out. If I go shop at an off-price retailer, I'm more likely to find what I'm looking for at Nordstrom's (JWN) Rack than at Citi Trends... but what I'm trying to see during a visit is whether a company is serving its target market well. That doesn't always mean serving me well. In fact, in 2008, shortly after buying shares of energy drink company Monster Beverage (MNST) – then called Hansen's – I found myself sleepy while driving at night. I bought a Monster energy drink instead of a coffee at a highway convenience store and was up for the next 24 hours. It was my first (and last) Monster. But man, that thing did the trick... It just wasn't for me. Had I rejected the stock because I wasn't planning on consuming the product, I would have missed out on one of the greatest-performing stocks of all time. Take a look at what MNST shares have done since my ill-fated taste... Some investors can mint money without ever leaving their desk or speaking with a company... That may work in some sectors, but it's dangerous when investing in consumer stocks. Things aren't static in the consumer sector, so products can catch heat or go cold at any time. Retailers, hotels, and other leisure companies must execute consistently, or they risk losing their customers and their positioning within an industry quickly. Often, you can see inflection points out in the real world long before they ever show up in a financial statement. One example of an inflection point that was easy to miss happened a few years ago with WW International (WW)... A few years back, a fund I was consulting with asked me to do research on its short position in the company, which was then known as Weight Watchers. The fund managers wanted to make sure they hadn't missed something, because the stock was starting to go against them. I had successfully shorted the stock at a previous job in 2013, and I peripherally kept an eye on the company for years after that. I assumed that once I refreshed my work, I would still have a negative opinion. In addition to poring through the financials, I decided to join Weight Watchers to test out the service and see if the company had fixed what previously had been broken. To my great shock, it had. A big part of my previous negative thesis had been that Weight Watchers offered outdated technology in its digital membership. The app was unstable and crashed frequently, and it offered little that the plethora of free dieting apps out in the market didn't. The Weight Watchers app was terrible in 2013 and 2014, and that was a big part of my short thesis. But when I rejoined in 2017, the app was stable, had a great user interface, was easy to use, and offered tons of content. It even incorporated addictive social media features. It was great! My old thesis about a mismanaged and uncompetitive digital offering was out-of-date and debunked. This stock was no longer a short. That was obvious after spending an hour on the app. In just a year, WW shares jumped 203%... And I never would have seen it coming had I not spent $35 to join the service for a month. When I later complimented the investor relations rep at Weight Watchers on the extraordinary turnaround in the company's tech execution, my comment was met with surprise that I had actually tried out the service. I guess it was pretty rare that anyone on Wall Street bothered to give the app a test drive. While not every investment requires 'kicking the tires,' sometimes I don't know how people invest without doing so... This is a lesson I learned early in my life as a fund manager. I was tempted by a tiny casino stock called Monarch Casino & Resort (MCRI). The family-run company owned a single casino and hotel property in Reno, Nevada. That's it. That was the whole company... but it was a very profitable property, and the company's stock was cheap. It's inherently risky to invest in an undiversified company with just one property. Looking at a few online pictures wasn't going to suffice to make sure the location was as described, given this one property was all the company had. I had come across the stock in 2002 when it was trading below $5 per share, but I couldn't bring myself to pull the trigger despite its extraordinary cheapness. Conveniently, some friends invited me in the winter of 2003 to join them in Lake Tahoe for skiing. I flew into San Francisco and made a pit stop in Reno that included an overnight stay at the resort, a meeting with management, and of course, a little blackjack. When I returned to my office, I had the confidence to buy the stock. It went sideways for a while, but eventually became a five-bagger within three years... Thank goodness for that Tahoe invite, as well as for the patience of the friend I was traveling with, who indulged my pit stop. Not every investment will require you to rearrange your vacation plans to perform due diligence. But it's important to remember that you can't learn everything about your investments by simply sitting in front of a computer screen all day. In an upcoming special event, I'll share even more details about how my investment strategy can lead to big winners... This Thursday, at 12 p.m. Eastern time, I'm joining my colleague Whitney Tilson on camera. We'll will reveal how a "hidden" corner of the stock market could earn you gains of 300%, 500%, or even 1,000% over the long run. Even better, this approach requires much less starting capital than you'd except. Don't miss out on this free special event to accelerate your wealth... Make sure to register to attend right here. In the mailbag, some feedback on my piece discussing the recent frenetic trading in AMC Entertainment (AMC), plus some reader well-wishes... Have you ever done your own boots-on-the-ground research before making an investment? Did this kind of due diligence lead to any big winners? Have you ever had a loser investment that you think you might have avoided with more "kicking of the tires?" Let us know by sending an e-mail to feedback@empirefinancialresearch.com. "Berna, I trade full-time and traded AMC in five rounds this past two weeks. I just took another position in extended trading hours and placed an open order at today's closing price, with sizes adjusted for risk at these levels. I am only investing my profits from AMC the last two weeks. I'm looking for resistance at $72, then once that becomes support, AMC goes to the 90's with a possible high up to 120. If anyone else plans to invest in any of the meme stocks, I urge them to invest prudently and use trailing stops." – Vic B. Berna comment: Sounds like you are doing OK with this trading, Vic. All the more power to you... This stock isn't for me. I echo what you said about trading – and in particular, sizing positions – prudently, and using some trailing stops if you chose to venture into these treacherous waters! "I am ashamed to say I FOMO-ed in at $40 and then sold half when it hit $65 – a mere three hours or so later. Clearly this isn't investing." – Steve S. Berna comment: You're right, Steve... It's not investing, it's gambling. This is more akin to Las Vegas table games than anything you can find in a finance textbook... which is fine, as long as anyone partaking realizes the game that they are playing. "Berna, Finally! Can't wait for your own investing letter. Best next Thu on launch day!" – Michael C. Berna comment: Thank you, Michael! I am really excited for Thursday... and this new format to bring serious investors my best ideas. Regards, Berna Barshay
June 7, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply sign up here. |
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