If you have zero tolerance for miniscule-cap, highly volatile stocks with high risk/reward, then don’t bother looking at the chart below. But the reality is that so many consumer names – especially in retail – are trading at or near a bone. In other words, bordering on unworthy of any equity value whatsoever. The question with these names is quite simple. Is it going bust? If not then it is probably not going to stay near a buck for too long. Remember that we’re coming off a year where the average analyst/PM on the buy side was not allowed to like these poor-quality, highly-levered and risky names. They’re the kind of names where you get a golf clap from your PM if you’re right, but get fired if you’re wrong. I’m not condoning that by any means (it’s the opposite of the process we have at Research Edge between Keith and the Analysts), but it exists nonetheless.
My favorite name in this group of Bones is LIZ. Ok, at $2.50 it’s not really a bone. But in my mind anything under $3 is fair game. I’m increasingly confident that LIZ will not breach a covenant, will cut capex to a greater extent than most people give it credit for, and will start to show meaningful margin improvement after a multi-year slide starting in 2Q as it cuts away the fattest cost structure in all of apparel. Quiksilver is a close second. Cost cuts on an inefficient platform will help, with a call option of monetizing its core brands with a break-up of the company. It was driven down initially due to horrible performance associated with its ski/hardgoods business. But that’s gone, seasonality is back to normal, and balance sheet risk is slowly but surely being mitigated.
If you want any more details on our thought process here, or factors behind timing and sizing, please contact Jen Kane at .