Fool article explaining why I too buy beaten down gems like BEBE and ANF especially. Earnings on the 15th should be stellar. Only a matter of time. And timing.
"From the Dressing Room to the Portfolio
The Stock I Never Thought I'd Own and Why I Do
By LouAnn Lofton (TMF Lou2)
(Feb. 3, 2000) -- "Why would I ever buy stock in a retail company whose clothes I don't wear? It doesn't make any sense for me to be a shareholder. I don't shop there." Those were my thoughts until recently about retailer and icon of all that is the American college experience, Abercrombie & Fitch (NYSE: ANF).
I'm a buy-what-you-know investor, meaning that I want to own stock in companies whose products I use. Granted, that's not the only requirement I have for investing in a company, but it does matter to me. If I don't use a product, there is a strong chance I won't buy the company's stock, even if the financial numbers are there to back it up as an investment. Of course, this has limits, but I enjoy looking where I spend my dollars and seeing if any investment opportunities present themselves.
This buy-what-you-know thinking has led me to some of my most profitable investments. I like coffee and I own Starbucks (Nasdaq: SBUX). I've shopped at the Gap, Old Navy, and Banana Republic for forever, it seems, and now I own shares of Gap Inc. (NYSE: GPS). I've worn Nike sneakers since I was a grade-schooler, and now I'm a Nike (NYSE: NKE) shareholder (though an admittedly somewhat disgruntled one). It's not enough, though, to buy stock in the companies you buy products and services from. It's not quite that easy. Making sure the company is financially sound and strong is just as important.
Over the last year, Abercrombie & Fitch kept coming across my investment radar. I'd seen articles about it here on the Fool, and had seen its numbers detailed in comparison with Gap Inc. Problem was that I didn't shop there. My old job required me to wear suits everyday, and that required me to spend most of my shopping dollars on clothes for work -- not for the fun and comfy clothes Abercrombie offered.
Then (imagine blinding light and a chorus of angels) I took a job with the Fool. If you didn't know already, the dress code here is very casual. Suddenly, a whole world of shopping opportunities opened up to me. It was as if a veil of dry-cleaned wool had been lifted from my eyes. I would suffer no more in summer weather wearing pantyhose. I could wear colors other than black, brown, and navy. I was a free woman! Okay, perhaps it wasn't that dramatic, but it was something of a revelation. Never one to stop a revelation in its tracks, off to the mall I trekked. The very same Abercrombie army-green flare-legged cargo pants that weeks before had made me shrug my shoulders with apathy now looked super-cute and super-wearable.
Before, I hadn't allowed myself to look seriously at Abercrombie as an investment since I wasn't an Abercrombie customer. But, now that this wonderful change in my life had made me look differently at the company as a shopper, I also saw it differently when I put on my investor's cap. However, before any investment dollars could be allocated Abercrombie's way, I had to do my homework on the company's sales growth, profit margins, and managerial efficiency.
Based on the company's most recent 10-Q filing with the SEC, Abercrombie's gross margin, a measure of how much revenue a company keeps after the material costs of the business are taken out, came in at an impressive 42.5%. Its net margin, which shows how much a company keeps after all costs and taxes are paid, was an equally impressive 13.6%. Not only were margins looking good, but sales were up 25% compared to the year ago quarter, with net income up 56%.
The good news wasn't just on the income statement, either. Abercrombie is debt free and cash rich. Abercrombie's Foolish flow ratio for its fiscal third quarter was an impressive 0.70. The flow ratio measures how effectively a company is managing its product and cash flow. As a rule, anything below 1.25 is considered to be good, and below 1.0 is even better.
After taking a hard look at Abercrombie and its business, I decided it was a stock for me and added it to my portfolio. A change in my life led me to examine Abercrombie & Fitch as a potential investment, and because of that, I ended up buying stock in a company that I never imagined I'd own. I began to wonder what other changes in life might prompt such new investment ideas. If we buy what we know, what happens when what we know changes? New ideas and new investment opportunities, that's what!
My experience isn't unique. See what changes in your own life could lead you to new investment ideas. Consider how your interests might have changed, how your expectations might have shifted, how your cash might be flowing into a new place as a result of a change in your life.
Do you have a new baby in the family? Why not look into The Right Start (Nasdaq: RTST) or Mattel (NYSE: MAT)? Are you a new cable Internet access subscriber using @Home to surf the Fool faster than a speeding bullet? Consider Excite@Home (Nasdaq: ATHM). Have you recently retired and plan to spend some time improving your golf game? Have a look at Callaway Golf (NYSE: ELY). Are you fed up with Microsoft and swear you'll never go near Windows again? You can look at Red Hat (Nasdaq: RHAT) or VA Linux Systems (Nasdaq: LNUX). Are you sticking to your New Year's Resolution to get in shape? Nike might be for you.
It's all about looking where your spending money is going and making your investment dollars follow it. But as always, do your due diligence first. If Abercrombie had turned out to be a mediocre company financially, I wouldn't have bought the stock -- no matter how cute my new army green flare-legged cargo pants are. |
