6/13/14 Picks

Long LULU ($37.4)

• LULU, the athletic apparel retailer, has been beaten down over the past year 44% due to product recalls, reduced financial projections, and management turmoil. 
• They missed earnings yesterday and fell 16% due to lowered guidance. Part of the miss was attributable to the repatriation of offshore profits, which will be used to buy back $450 million worth of shares.
• LULU has finally bottomed out and should bounce back. Their product is widely regarded as the highest quality activewear and they maintain a very loyal customer base. As much as I hate retailers in the current environment, this opportunity is an exception. Yesterday's decline provides a great entry point. 
• Valuation: LULU's P/E ratio has dropped below 20. This compares to Under Armour's 75 (with a similar growth rate) and Nike's 25. It is simply too cheap given its current growth rate. PEG ratio: LULU 1.26, UA 2.58, NKE 2.05.
• Profitability: Operating Margin: LULU 26%, UA 11%, NKE 14%. EBITDA Margin: LULU 29%, UA 13%, NKE 15%. 
• LULU is more profitable than its competitors and is still growing top and bottom line at an amazing rate. 
• Hopefully they have their issues behind them and will begin reverting back to a price range that reflects their profitability and growth prospects. 

Update from Tuesday regarding returns. We are now up in 9 of 10 positions with a 40 day return of 9.6% (unleveraged, equal weight, half long - half short). If you got involved with last week's OUTR July put, it is up 100% since Friday (not included below).

6/10/14 

Quick update on our monthly return. Assuming equal weight for each position and no leverage, 7.7% for the past month. This was generated from the same amount of longs and shorts, five each.

6/6/14 Picks

6/6/14

We are back after a two week research hiatus.

Short OUTR ($70.6)

• Outerwall is the company that owns Redbox and Coinstar.
• OUTR has grown tremendously over recent years in very profitable fashion. They literally own cash machines, but the stock has reached its peak.
• Redbox, the overnight movie rental machines outside retailers, makes up over 80% of OUTR's revenue.
• Physical movie rentals are in permanent decline, the industry has contracted 14% annually the past five years and it is accelerating.
• OUTR has deployed 40,000 of these machines across the country at an amazing pace... until this year when they took 500 out of service. Apparently they have run out of good locations which begs the question how they can possibly continue to grow as analysts predict.
• We aren't the first people to jump on this sinking ship, OUTR's current short interest is a ridiculous 37% of float, but it looks like we are timing it just right. The shares short have been cut in half in the past six months, helping to mitigate the short squeeze risk.
• So the obvious question is why the stock is up 25% in the past year and at an all time high? The stock hit its 52 week low last September ($46) after poor guidance. A few weeks later, Jana Partners bought 13.5% of the company and the stock spiked. Their goal was to unlock value, which they accomplished with hugh stock buybacks. This artificially inflated the stock all the way to $70 where it stands today.
• It appears as if Jana has accomplished its goal and is taking their money and running. In their latest 13F they reduced their position from 13.5% to 8.4%. It also looks like TPG-Axon has completely disposed of its stake in their most recent 13F.
• Short term - OUTR is headed back to its natural position (sub $50). Long Term - It has a one-way ticket on the Blockbuster bus.
• Great article and more detail on the company/trade can be found here:  http://online.wsj.com/news/articles/SB10001424052702304422704579574191322689248
• Also, there aren't many shares available to short so a good alternative is July $65 puts.