Killing a Sacred Cow, in the Hunt for True Value
Adem is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’ll make you a promise, investing can really be this simple: identify trends of “tomorrow” and be on the right side of them--first.
That might strike you as a “growth investment strategy” but it’s the only way to find real value if you keep one simple truth in mind:
Every Aspect of Investing Starts and Ends With a Company’s Growth Potential
The only way to find true value is to find undervalued growth; growth is in demand—what’s more valuable than that?
How to Find Undervalued Growth
First, find overhyped stocks, the one’s where naïve investors overpay for growth—then, look in the opposite direction and you’ll find value.
Take Amazon (NASDAQ: AMZN), I know I’ll get some nasty comments for saying this, so just fire away. I don’t care. Amazon’s a great story, I love Jeff Bezos, but it’s overhyped.
It’s not because Amazon is trading at 150x forward earnings, crazy as it sounds. If you’ve subscribed to this blog you know the first rule for retail is: “if you can’t explain why you’re different, you’d better charge less.”
Eureka Moment: It’s Far Better to Meet the First Criteria Than the Second.
My problem with Amazon is this simple: I don’t know what it does anymore. I know they sell stuff online, sell kindles, stream movies, lend money, publish books, whew!
That’s too many directions for this investor and it should be for you too.
Amazon “super bulls” get the online retailer paradigm shift, yet they miss the one that says: retailers will need to offer a unique brand and experience. Amazon offers cheap products, great for customers but just awful for investors.
If any other business was over expanding into multiple markets, with huge margin concerns, you’d be terrified. Amazon has a visionary CEO like (a great retailer) Starbuck’s does, but Amazon lacks the unique experience that Starbuck’s offers to its customers.
Starbucks Coffee: $4. Amazon “Prime”: $6.58/Month. No. Thanks.
The scariest thing is Amazon has become one of these “sacred cow” stocks (like Netflix) that you can’t be bearish on without having extreme vitriol being thrown in your general direction.
That’s Always a Red Flag
If shareholders are so bullish, then why get so defensive?
That’s when you know hype has gone way, way too far. It’s also when you know that there may be value in the other direction.
A Quick Note on the Pitfalls of Brick and Mortar Retail Investing:
“Traditional” retailers have large overhead costs. For any retailer to compete in this space it’s even more important for them to “differentiate” (see previous rule). With that said, for any traditional retailer to succeed in the future it must be both focused and offer a unique customer experience—avoid commoditization.
Two that fit the bill, by the numbers:
GNC Holdings (NYSE: GNC)
It saw a 45% rise in EPS from 2011 to 2012 and yet its P/E is only 15 and projected PEG is 0.66? Furthermore, it sports a 26% ROE. Muy Bueno!
Bed Bath & Beyond (NASDAQ: BBBY)
It has a 26% ROE and a 17% ROC! Further, it recently sported 10% growth in EPS and carries a P/E of 13 and P/EG of 1! Muy Bueno #2.
That’s all the numbers are; a good starting point. Many doomed “traditional” retailers (RadioShack, etc.) have looked incredibly cheap at some point, by the numbers. Numbers don’t mean much if you’re arrow is pointed down.
*Value Eureka Moment*
What Makes These Retailers the Same is What Makes Them Different-From the Competition
Repeat: “If you can’t explain why you’re different, you’d better charge less.” Write that down, memorize it, understand it, recite it, there’s more for you in those 11 Foolish words than you can learn from watching 11 pundits on CNBC.
What do these retailers have in common?
They Offer a Unique Experience
Have you ever been in a Bed Bath & Beyond? It’s like adult Lego Land, I could spend all day in there tinkering with their gadgets and trying out memory foam, etc. GNC is the only place real fitness buffs think of to get all of their “pump juice” as they know they’ll have everything from supplements to multi-vitamins.
They’re not all things to all people. Amazon may get a free pass, but it has an engrained competitive advantage due to its platform. All retailers should strive for a focused brand, but “storefront” ones who don’t will be extinct “tomorrow.” You can tell that Bed Bath & Beyond management “gets it” because every acquisition they make (World Market) or brand they own (buybuy Baby) is focused and offers a unique experience as well.
It May be a Bumpy Ride
But these are legitimate values. They’re undervalued (GNC may go lower with the Herbalife drama) but have growing EPS with strong ROE. It might take a while but considering that the above criteria is met, these businesses are likely to survive (and thrive) long enough for the market to realize it—and for you to make some real money.
Adem Tahiri owns shares of Starbucks. The Motley Fool owns shares of Amazon.com, Netflix, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Amazon.com, Bed Bath & Beyond, Netflix, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!