Chico's and Dollar General
All great investors from Warren Buffett to Peter Lynch always stress the importance of thoroughly understanding the business before purchasing the stock of a company. Some of the easiest businesses to understand are the ones that you use in your every day life. My personal favorites from among those are retailers.
Besides the aforementioned fact that retailers are easy to understand, there is a definite methodology to investing in retailers.
Every first Thursday of each month, retailers report same-store sales. Same-Store Sales are sales dollars generated only by those stores that have been open more than a year and have historical data to compare this year's sales to the same time-frame last year. Basically, it compares how the company is doing this month to how they were doing in the same month of last year. Usually, if there is a sharp discrepancy between what is expected by analysts and what is reported by the company, the stock becomes very volatile (up or down). Usually, when a good company has a bad couple of months, it creates a nice buying opportunity for a vigilant investor. The important piece in that last sentence was that the company has to be good. If the business of the company is fatally flawed, you could potentially lose your investment. In most cases, the problems are temporary, unless there has been some dynamic shift in the industry.
A couple of months back, I picked up a women’s retailer called Chicos (chs). Chicos reached a high this year of around $50. At that point, it was trading above 40 times earnings (pretty high valuation, especially for a retailer). As investors realized that Chicos could not maintain its high earnings growth rate of the past, the stock started to go down. By August, it had missed some same-store sales numbers and was trading in the mid 20s or around 20 times this years forecasted earnings. Then in August, it reported a decrease in same-store sales number. This was the first time in something like 9 years that they had reported a decrease in same-store sales. The stock crashed all the way to $17 or about 15 times this years lowered earnings estimate. I picked about 350 shares around $17.91 with the hopes that it would fall farther and I could buy more. To be continued…
In my next blog, Ill explain the reasoning behind picking up chicos and describe a retailer that is almost ready to be bought in Dollar General (DG).
Besides the aforementioned fact that retailers are easy to understand, there is a definite methodology to investing in retailers.
Every first Thursday of each month, retailers report same-store sales. Same-Store Sales are sales dollars generated only by those stores that have been open more than a year and have historical data to compare this year's sales to the same time-frame last year. Basically, it compares how the company is doing this month to how they were doing in the same month of last year. Usually, if there is a sharp discrepancy between what is expected by analysts and what is reported by the company, the stock becomes very volatile (up or down). Usually, when a good company has a bad couple of months, it creates a nice buying opportunity for a vigilant investor. The important piece in that last sentence was that the company has to be good. If the business of the company is fatally flawed, you could potentially lose your investment. In most cases, the problems are temporary, unless there has been some dynamic shift in the industry.
A couple of months back, I picked up a women’s retailer called Chicos (chs). Chicos reached a high this year of around $50. At that point, it was trading above 40 times earnings (pretty high valuation, especially for a retailer). As investors realized that Chicos could not maintain its high earnings growth rate of the past, the stock started to go down. By August, it had missed some same-store sales numbers and was trading in the mid 20s or around 20 times this years forecasted earnings. Then in August, it reported a decrease in same-store sales number. This was the first time in something like 9 years that they had reported a decrease in same-store sales. The stock crashed all the way to $17 or about 15 times this years lowered earnings estimate. I picked about 350 shares around $17.91 with the hopes that it would fall farther and I could buy more. To be continued…
In my next blog, Ill explain the reasoning behind picking up chicos and describe a retailer that is almost ready to be bought in Dollar General (DG).
posted by Amit Dhuleshia at 6:34 PM
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