Tough Love

During the development of my Get Started Investing! class (intro to investing) I invited some friends to take the class and provide feedback. I implemented the feedback, then set a date to teach it to my friend Jackie, one of my toughest critics. She’s not afraid to tell you what’s on her mind and doesn’t sugar coat anything. Unlike the other two friends, Jackie didn’t have any investing experience so I knew I needed to find a way to connect with her. I ended up scrapping much of my program and rewrote the class. That’s when I came up with a dating approach to investing and used The Hershey Company as my date. At the end of the class she said, “it was interesting, but I’ll have to think about it and give you my full review.” Oh boy. This should be interesting. A couple days later she delivered her written critique. It went like this: “I’d so enjoy criticizing you Brian but I did learn and have to say that the hour and a half went by surprisingly quickly. Looking at it from a dating angle was clever. I know how to research and ask questions about possible investments! Note - the only issue I saw was that orange was spelled wrong on the chart. LOL!” Ms. Jackie didn’t give me an A, but she did provide the inspiration for a stock dating class.

 

Jackie began thinking of companies to look into for investments. Two of her favorite companies are Stew Leonards and Trader Joes. No bueno. Privately owned. The next two companies she came up with were publicly traded, Chewy and Bath & Body Works. Jackie loves her cats and Chewy (CHWY) delivers all her kitty supplies. Jackie also loves her collection of fancy soaps and sanitizers made by Bath & Body Works (BBWI) so she had her first two companies to look into.

 

Let’s take a closer look at the Bath & Body Works to see if there is an investing opportunity. Bath & Body Works was in a serious relationship with Victoria’s Secret. They lived together inside a company called Limited Brands. On the surface everything seemed fine. Victoria lounged around in her attractive intimate wear and everybody loved her. Bath & Body Works had a bit of a germ phobia, but always smelled wonderful. After a while investors began to notice that Victoria was kind of a drag and holding back Bath & Body. She tried desperately to revitalize her brand and introduce new product lines, but nothing seemed to resonate with her customers. Although Bath & Body generated a smaller portion of total sales, it was humming along nicely, connecting with its consumers and had a strong pipeline of innovation. On August 3rd 2021, investors voted Victoria out of the house and the two companies went their separate ways. Victoria’s Secret was spun-off into a separate company under the ticker VSCO. Limited Brands changed its name to Bath & Body Works and began trading under the ticker BBWI.

 

Now that Victoria is out of the house, we can talk about how great Bath & Body Works is and Jackie's addiction to overpriced soap. As for me, I’m fine washing my hands with Soft Soap, but when I go to Jackie’s house I do enjoy her fancy upscale soaps. Since engaging in Bath & Body research I’ve noticed Bath & Body Work’s products in many other bathrooms and kitchens. They seem to have a loyal customer base too.

 

The soap may be overpriced, but the stock appears to be underpriced. Morningstar values the stock at $70 per share. Bath & Body Works is currently trading at $35. That would be a 50% discount to its fair value. Now that’s a bargain! Warren Buffett advises buying stocks with a margin of safety, which means estimating a fair price to pay for a company, then buying it only when it is selling at a discount to its fair value. Essentially, Warren tries to buy a dollar for fifty cents. BBWI seems to meet that criteria.  

Is this a quality company? Well, Bath & Body Works is a market leader in several product categories. They are an innovative company with many opportunities to expand into new markets. They have very nice profit margins and its Return on Invested Capital (my favorite measure) has been consistently north of 20% the last three years. They have a little more debt than I’d like to see at $4B, but they are making an effort to pay it down. They also pay a dividend of 2%, so we can get paid while we wait for the stock to recover. Overall it seems like a solid company. If you think Bath & Body will clean up the second half of the year, then it might be worth a look. Jackie let me know that Bath & Body Works runs some great sales and that’s the time to stock up. Thanks to Jackie I got introduced to a very interesting company.

 

This year our family vacationed in Las Vegas. We stayed with my aunt and uncle so we wanted to treat them to dinner before we all went to see "O" (a Cirque du Soleil show) at the Bellagio (MGM). My uncle recommended The Cheesecake Factory (CAKE) inside Caesars Palace (CZR) which is right next door to the Bellagio. After our photo shoot at Caesar’s statues we made our way to the restaurant and got right in. The waiter was friendly, the food was excellent and the prices were very reasonable for the Las Vegas Strip. Since we were at the Cheesecake Factory we had to have dessert. We decided to split a piece of the Chocolate Tower Truffle Cake. When the waiter came out, he placed two plates of chocolate cake on the table. I reminded him we only ordered one piece of cake. He said, “I know. I cut it in half.” That was one ginormous slice of cake and it was delicious.

 

The Cheesecake Factory has struggled a bit since the pandemic, but seems to be recovering nicely. They delivered record revenue in 2023 bringing in $3.4B. They stopped their dividend during the pandemic, but reinstated it in 2022 and began increasing it. Return on Invested Capital has been under 10% since 2019, but it’s moving in the right direction. They have a modest amount of debt ($400M) that seems very manageable. They are planning to open 22 new restaurants this year. I was also pleased to see the founder, David Overton, was still running the company and writing his letters to shareholders. I love investing in companies run by the founder because they have skin in the game and a strong desire to leave a legacy.

 

 

I mentioned last week that earnings season is heating up with lots of companies reporting their quarterly results. I especially like to pay attention to the companies I own, but also keep tabs on companies on my watchlist. Earnings can send stock prices to new heights or directly to the bargain bin. It is the bargain bin I’m most interested in. This week Spotify (SPOT) reported its earnings and investors loved the strong profits and subscriber growth. As for me, I’m not a Spotify user and the stock price was already over-priced. Spotify has some pretty stiff competition in the music, podcast, and audiobook space as Apple, Amazon, and Google all play in its backyard. I think I’ll let SPOT run.

 

 

Mr. Lamb announced earnings Wednesday morning and unlike SPOT’s earnings, investors were not too pleased. They punished Mr. Lamb, tanking his stock price 28% from $78 to $56; putting Mr. Lamb in a serious jamb. Mr. Lamb was very disappointed in his results and his new stock price. As for me, I was happy to see Mr. Lamb drop in. I just need to make sure Mr. Lamb didn’t break any bones on the way down.

 

Mr. Lamb’s full name is Lamb Weston and is known as (LW) around the stock market. I’ve known about Mr. Lamb for a while, but never seriously looked into the stock because the stock price always seemed a bit pricey, but now he has my attention. Mr. Lamb is the largest supplier of frozen potatoes in the US. In simple terms he makes all those delicious french fries found in fast food restaurants. Its largest customers are McDonald’s, Burger King and Wendy’s. Nothing like a little market research.

 

 

I just started this segment called “One Share at a Time” and I already broke the rules. I splurged and bought two shares this week. Bath & Body Works (BBWI) was too cheap to ignore. It has a loyal following and Jackie as a long-time customer. Just like I couldn’t resist dessert at The Cheesecake Factory, I couldn’t end the week without buying a slice of CAKE. I did have $100 to spend this week so on 7/24/24 the market dropped and Mr. Market handed me a nice buying opportunity. I picked up one share of BBWI @ $35.00 (50% off sale) and one share of CAKE at $37.00. If CAKE doesn’t work out, that’s on me. If Bath & Body Works flops, I’ll blame Jackie. Just kidding Jackie!

 

Stay tuned. I’m planning to build a stock tracker to monitor the “One Share At A Time” stock picks and make it available to fellow Navigators.

 

 

Remember the Navigator is for educational purposes only. If you decide to invest with real money, please do your own research or consult your financial advisor before putting real money to work. I know this language sounds boilerplate, but it is important to follow the first rule of investing: don’t give money to strangers (this includes financial advisors). To avoid giving money to strangers we can date the companies we’re interested in prior to tying the knot. Dating involves understanding how the company makes money, who their competitors are, a solid financial history (sales, net income, ect), check out the management (debt, dividends, ROIC), and estimate a fair price. My favorite dating apps are: QuickFS.net, Morningstar.com (requires a subscription/lots of free information too), and the company’s annual report. Enjoy your date.      

 

If you have any questions or feedback, feel free to e-mail me at:

 

Have a great weekend!      

 

Brian