It seems a quaint idea these days but there was a time that "hedge fund" actually meant controlling portfolio risk by keeping a balance between longs and shorts. Managers would pick their favorite name in a sector and get long then hedge their risk by shorting their least favorite stock in the same sector. While it's sexier these days to take massive risks in exotic derivatives involving paired trades in correlated global assets, we old timers still enjoy the more traditional method.
Though not an old timer herself, Lisa Rapauano founder and portfolio manager of Lane Five Capital Management, is a traditionalist unafraid to do fundamental work and take positions based on what she finds. That's right, Breakout spent a whole segment without once mentioning Europe or forcing me to rage against the ratings agencies. Five-minutes of a conversation focused on domestic fundamentals with a real live contrarian. Sit back in drink it in like a cool lemonade on a 100-degree day.
Long: Skechers (SKX)
When we last saw Skechers (SKX), the company was being hyped to the heavens based on enthusiasm over Shape-ups, a shoe which allegedly toned your backside as you walked. The fad passed when it was discovered that the glute tightening feature only worked if your walks were daily and over 20 miles per session. If you think the news disappointed the flabby-tush set, it emotionally destroyed Skecher bulls and the company itself. When Skechers got caught with millions of dollars of unsold Shape-ups, the stock dropped from over $40/share into the teens; over 50% just in the last 52-weeks.
The shorts are banking on more stock pain to come when Skechers finally takes the hit and writes down the remaining inventory. But Rapuano is taking the other side, accumulating stock right here, right now. She says Skechers was a vibrant business before the Shape-up debacle and will be one again once the clean up the mess. Ex the looming write-down, she's looking for $2 of EPS, putting the company at 7x earnings and trading basically at book value.
Short: Vera Bradley (VRA)
Many times when one company gets hot, investors start looking for the next big thing in a related space. Rapuano thinks that's the situation with the stunningly successful Lululemon (LULU) and Vera Bradley (VRA). Lulu, a maker of yoga wear and other leisure clothing, has done tremendously well building its stores and distribution network. Vera Bradley, maker of bags and leisure items has done less tremendously well distributing its own product and is beginning to roll out new company stores.
That's where the similarity between the two names ends, according to Rapuano. Calling VRA the "anit-Lululemon" she says the Street is wildly overestimating the potential market opportunity for Vera. The company already has a distribution network of some 3,300 retailers, meaning there's been no scarcity of opportunity for those who want Vera Bradley product. What's more, and this is the kiss of death for specialty clothing, VRA's target customer is drifting from middle-age to 20-somethings to the Tween market.
The problem with a strategy of trying to appeal to younger customers is two-fold. First, you lose your older customers as only a select group of very sad middle-aged people want to dress like teens. Two, staying "hot" with teenagers is impossible. Not difficult, not challenging, just not possible. Rapuano says the longs are going to end up bitterly disappointed with Vera Bradley and is placing her bets accordingly.
One long, one short. That's quite a lot of bang for the buck in one segment, my friends. Check out the videos, check out the stocks and let us know what you think in the comment section.
- hedge fund
- book value
- Vera Bradley
- potential market opportunity
- exotic derivatives