1. Moving Overstock.com (OSTK) significantly higher on our long list. Gaining confidence ahead of our Black Book presentation on this name on Wednesday, June 9th @ 2:30pmEST. This is a company where a lot has changed in the last 2 years. There was a period of several years where we, as retail analysts, ignored OSTK due to its direct correlation with cryptocurrency prices. Now we think it's interesting for both the potential value of its crypto currency assets and the turnaround in the core ecommerce business. It is another company with relatively low sell side coverage, and seems misunderstood from the standpoint of consensus. There are two core business opportunities to invest in here: 1) Ecommerce Platform - Overstock.com is one of the original online retailers founded back 1999. The product assortment is broad, but is focused on the furniture, home décor, and home improvement segment. Top competitors include Wayfair, Ikea, Walmart, Amazon, Target, and Lowes/Home Depot. Despite that stout competitive set, Overstock remains relevant over 20 years after its founding and has recently been gaining share; 2) Blockchain Assets (more specifically tZero) - As those who have followed Overstock over the years probably know, around 2014 CEO Patrick Byrne took a deep interest in cryptocurrencies and blockchain technology. Soon after, through Overstock, he started Medici Ventures and began making investments in blockchain assets. For a long time it was viewed as poor use of capital. However after the evolution of real world blockchain applications over the last 5 years, there are some real business opportunities for the assets today, and none more powerful than that of Tzero. Tzero is a leader in trading of tokenized digital securities and is one of the few 'by the book' blockchain trading platforms that is a member of FINRA and SIPC and registered with the SEC as a broker-dealer. We see a base case for a $125 stock, suggesting 60%+ upside with a Bull case highlighting a 4-bagger and a Bear case suggesting -35% downside reflecting a significantly positive risk/reward skew at current levels. So we’re looking at a 4-bagger upside vs 35% downside – can’t find that kind of risk/reward elsewhere in retail.
2. Nike (NKE): Moving higher on conviction list as a Best Idea Long. The multi-year call here is that the bulls are not bullish enough. Digital now stands at 21% of total sales by my math, and if you believe the management team (directionally, I do) it will be closer to 50% in 5-years. That’s a massive Gross Margin tailwind as Digital is 1,000bp gross margin accretive for Nike. In our model, we’ve got gross margins pushing 50% by 2025, driving EBIT margin to a new peak of 19% -- which is a stunning number for a company in this business. The consensus is bullish at 17% -- but not bullish enough. This name is expensive, and it should be. If you look at the upcoming quarter – to be reported on June 24th – the Street is sitting at $0.51 per share, and we’re 50% higher at $0.79. I know a host of junk-tailers have been beating by more than that, but this is the highest quality name in retail that is just killing it in the consumer marketplace. So 40x $6.70 (Street at $5.88) gets to $270 – discounted back to a 12-month value suggests a $195 stock in a year. While I think there are other recovery names that offer up a better return profile, I’ll definitely take Nike’s upside – especially given how I think the catalyst calendar will play out over the next year.
3. Adidas (ADDYY): Taking this one commensurately higher with Nike, as I think that the Strategic Plan for both companies looks to be more like a Global Duopoly than I’ve seen in my 27-year career. Adidas is finally playing it’s own game instead of playing Nike’s. This is a double over a TAIL duration as it closes the valuation discount with Nike and beats earnings estimates handily – while putting up the sales and earnings consistency that first put Nike on the board. Best Idea Long.
4. RH: Simply put, if you fail to acknowledge that this company is legitimately evolving into a global home furnishings luxury brand (in effect, creating a classification that did not previously exist), then you're either living under a rock, or you don’t respect math. Operating margin is currently tracking towards 25% -- Furniture companies simply don’t put up these kind of margin levels. RH is sitting in a group with no peers in this business. We’re at $5.00 in the quarter to be reported on Thursday June 9th, that compares to the Street at sub $4. But let’s be clear…you don’t get paid on RH by category strength around current business trends. The big payday – like 2-3x from where are today – is the TAIL call as it builds out it’s global luxury portfolio. If the public market fails to recognize it, we think that one of the European Luxury houses will, as RH is setting itself up at this stage of it’s growth as an early cycle global growth driver for the LVMH’s of the world. For a company with such category dominance, lack of any real competitor with scale, superior margins, returns, and growth runway, we think it’s easily fair to pay a 30x-35x multiple for such an outsized earnings number. There’s your $1,200-$1,400 stock. Discount that back to today’s dollars by 10% annually and you get to a stock of about $750-$800 in a year, or 30% upside from here.
5. Bed, Bath & Beyond (BBBY). BBBY got caught up in ‘meme week’ and was up 60% at one point – on no news – and closed the week up 15%. I completely buy-in to the fact that there is finally a real management team in place at BBBY, at it has its best chance surviving that it’s had in years. But I’m simply not attracted to companies that ‘have a decent chance of surviving’ on the long side. I like names that will dominate the competition into submission. And BBBY is definitely not a candidate in that regard. It’s quite the opposite. This name has been losing share – without question – all pandemic – and will continue to do so when things normalize. The company remains overstored, has a permanently diminished place in consumer’s wallets. The Street has this company returning to a 6% margin and $3.50 in EPS power over a TAIL duration, which is simply too optimistic. We think $2.00 is a stretch. The only thing that bugs us about this short is that the short interest is sitting near 30% -- which is high by any measure. But hey, JCP was 70% shorted when the stock was at $40 and that was a massive money maker for us. This is definitely a name we want to fade on strength.
