The saying that value investing is like watching paint dry or grass grow is certainly true. Months and even years go by with very little to say about portfolio holdings.
One example is my position in Foot Locker (FL). I bought the stock because it had a rock-solid balance sheet. But it had made some mishaps in merchandising and I got in at what I thought was a beaten-down price. Then the Panic of 2008 hit and the stock price cratered, as did just about all my holdings (except for DirecTV and Fairfax Financial). I held Foot Locker because the balance sheet appeared to be holding up and the company pays a decent dividend.
This week's Barron's is running a favorable story on Foot Locker. Some parts:
The company handily beat analysts' first-quarter earnings forecasts,
due to lower costs and a double-digit increase in average selling
prices. The current quarter will be challenging relative to the
year-ago span, when consumers were spending the government's stimulus
checks, but the back-to-school season looks promising. Susquehanna
Financial Group upgraded its rating on the stock to Positive from
Neutral following the release of first-quarter results, saying it
expects cost-cutting initiatives and inventory controls to prove
sustainable.
And this:
Like rival Finish Line, Foot Looker also is closing underperforming
stores after overexpanding in the late- 1990s. Last year it shuttered
208 units and opened 64, for a net loss of 144 stores. This year it
could close up to 100 and open about 40, mostly in Europe. In the first
quarter the company closed 24 units, opened 16 and remodeled or
relocated 47. All told, management has reduced store count by 259 units
in the past five years, and has sliced inventory by 17% in the past two
years, to $1.24 million at the end of the first quarter.
That's some of the good stuff. Now the cautionary:
"A high multiple isn't warranted for a company that
has comped negatively [posted comparable-store sales declines] for
three years running, that is shrinking its store base, and is in an
industry that doesn't really offer any growth, even if it is the
dominant player in that market," says one skeptic, John Zolidis, an
analyst at Buckingham Research Group.
The path to earnings gains, Zolidis says, must come
from sales. His Underperform rating and a price target of 9, however,
suggest he is doubtful Foot Locker can achieve meaningful sales
increases in this "difficult retail climate."
Yet I remain a holder for now:
Hicks will be helped not only by the savvy moves his predecessor made,
but by Foot Locker's rock-solid balance sheet, which boasts about $400
million in cash -- or $289 million, net of debt. The company's ability
to keep generating the stuff has enabled it to pay a dividend of 60
cents a share, for a generous yield of 5.8%.
The economy could get worse before it gets better. Keep that in mind. It could be a while before this stock pays off. If it ever does.
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