My Core Value screen scored the following names as the highest ranking outputs on 11/20:
- Crocs Inc ($CROX)- watch, new
- Magna International ($MGA)- previously
- Westjet Airlines ($WJA.TO)- watch
- Foot Locker ($FL)- bought 4/30
- Mueller Industries ($MLI)- previously
- Lear Corp ($LEA)- new
- The Men’s Wearhouse ($MW)- previously
- Activision Blizzard ($ATVI)- watch, new
Not a lot for me to chew-on in this output, due to either sub-standard valuations or preexisting holdings. For example, we already own $SMP in the autoparts sector, so $MGA or $LEA would be duplicative. (Good to note that the sector seems cheap relative to forward expectations, for what that’s worth.) Again, $MW would overlap with our preexisting $JOSB position, but I’m glad that takeover/merger battle is materializing as envisioned. $MLI just isn’t cheap enough to add compelling value to our portfolio. $WJA.TO has unabatedly run away from me since it first appeared in February.
I do want to highlight two names from this list…
Crocs Inc ($CROX)
Starting right at the top with Crocs, I’ll lead with my conclusion: there’s no way I’d buy CROX here, but I’ll keep watching it as long as it’s on the list.
On 11/13, Bloomberg reported that CROX was exploring “strategic alternatives” (i.e. a sale) with KKR and Blackstone. CROX rallied massively on that M&A news. The very next day, we got 13f filings, in which we found that one of CROX’s major shareholders, Leon Cooperman had closed his position. Undoubtedly, Mr. Cooperman sold his stake before the M&A story came public, but his exit is worth noting because it suggests there’s little organic growth in CROX void of exogenous intervention.
CROX is a free cash flow (FCF yield ~12.4%) story with a lot of cash to boot: shareholders have almost 22% net cash with almost 38% net cash+cash flow. That’s admittedly a bits deceiving, because so much of their cash is tied-up abroad. According to their 3q13 10Q, 97% of their cash ($323.6/332.5mm) is held abroad with 22% restricted ($72.3mm) by governments like China. The rest of their foreign cash is subject to US repatriation taxes, so there’s less available to shareholders for buybacks/dividends than meets the eye. That meaningfully erodes CROX’s valuation for a takeover–especially when you consider that I found the name (and Private Equity is evaluating an LBO) due to its low EV first and foremost.
This is a business in decline. They’re a one-trick-pony who’s never managed to sustain another moat–supplementary or complementary to their core product line. Whether FCF or EPS, any CROX growth number will decline in the coming years, but the market knows that. Further, with investment an unattractive strategic option, that’s all the more reason for CROX to distribute its substantial cash to shareholders, given its strong balance sheet.
Helping the buyout story, CROX would be much more valuable as a subsidiary, complementing a more diverse footware product line like that of Wolverine World Wide ($WWW).
So, I’ll wait and watch this name. If the technicals fall into line, I’d feel more like I have an edge in CROX. I can envision a better entry point under a $13 right shoulder were CROX to develop a daily, short term Head & Shoulders bottom here. Coincidentally, that would also represent a large retracement of the 11/13 M&A announcement’s rally. It still needs to form a lower right shoulder before breaking out >$14.5 neckline resistance en route to filling the gap >$17. The pieces are in place for such a breakout, particularly because of its daily LT falling wedge within a larger, weekly bull flag.
Activision Blizzard ($ATVI)
On the heels of my recent Netease ($NTES) analysis, I’m happy to see their American counterpart (and JV partner), ATVI, pop-up on this screen. However, I am surprised to see a second name in the electronic gaming space pass my filter, given the momentum rally in these new tech economy kinds of constituents.
While I want to hold off any transactions to avoid potentially weak Q4 holiday sales, ATVI has a few nice catalysts coming up in early 2014. Looking at the calendar, we can expect announcement of new releases like “Destiny” and “Hearthstone” around February. In addition, “Skylanders” should have a release date announced at the American International Toy Fair 2/16/14. The new year should be busy for videogames, given the new consols that were just released by Microsoft (Xbox One) and Sony (Playstation 4)–both expected to set records with their holiday sales.
I want to accumulate a stake in this name on weakness. I’ll likely pair it with a position in NTES to dip a toe into the high growth Chinese [consumer] market. Technically, I’d like to buy it with a $15-handle–otherwise I doubt I’ll play ball here. While there’s potential that the chart pattern has formed a daily bull flag here, the higher probability outcome is the development of a descending triangle with $16.1 support. Part of that bearish formation requires a rally to ~$17.5 to further substantiate trendline resistance, but the outcome thereafter is a breakdown to at least 200DMA ~$15.7, which would also fill down through the 7/26 gap. I say that’s the likely outcome because the weekly fractal shows a classic Cup & Handle with ST 2x bear divergence, and the handle’s formation is really immature (i.e. too shallow) thus far.
Here’s the performance to date (intraday) of unrealized positions still open from prior screens; buys executed throughout the year, as specified in my trade reconciliations:
Here’s a followup on the last Core Value screen 10/23:
Passive +5.75% (alpha= +2.23)
Active +4.58% (alpha= +1.06)
Here’s a followup on the Low Enterprise Value screen run 11/11:
Active & Passive +7.65% (alpha= +5.73)