Dark Side of the Street (Edition #68)
Survivorship Bias Thoughts, Turnaround Stock History: FRAN, Top Movers and More!
Welcome to the Dark Side of the Street! Here we shed light on the dark corners of the market. If you haven’t already, sign up below for weekly updates. If you’re new to special situations, see some of my learning resources on my substack home page to learn more! Feel free to reach out with any feedback.
Disclaimer: Nothing on this newsletter or on this blog is investing or financial advice; please see our full disclaimer here.
Thought of the Week
One of the main issues that stock researchers need to overcome is called survivorship bias. Its easy to perform basic research, come up with a strategy, backtest the strategy, see how well it performs, and believe that you have a winning strategy. But if the data used doesn’t include companies that have gone bankrupt, the strategy is inherently flawed because the data set is not complete.
It’s odd how difficult it is to find data on companies that haven’t survived or even just delisted. If a stock is not active, all their data gets pulled from popular sites. No charts or no easy to find statements. The best strategy to find old data is to go to EDGAR and recreate the information that is normally quickly found. If we are to learn from the past, we need to look at the failures in addition to the success stories. Because when we look at a company today, we don’t know if it will be successful or not.
This week I’m beginning the new series ‘Turnaround Stock History’ with a company that was hard to research, a bankruptcy (spoiler alert). It’s a sad story of a once promising company which fails during the beginnings of the COVID pandemic. I hope you enjoy!
Turnaround Stock History
Francesca’s Holding Corporation (FRAN)
We begin our story in 2013, where Francesca’s is crushing it as a small boutique retailer, catering mainly to women in ~360 locations throughout the US. The company has $300M in sales netting 47M which is a pretty ridiculous net margin (~15%) for the retail sector that is normally happy with 3 or 4%. This is a growth company and management is hoping to grow to 900 locations throughout the US.
But by 2015, investors should begin to become skeptical of FRAN. The company now has 539 locations but only $377M in total sales and is now netting only 32M. Something is off, but management keeps on rolling, pushing for top line growth over operating metrics.
In 2018, a true turnaround stock is born as Francesca’s has declining revenue and a stark decline in net margins. By 2019, management admits they have a problem and develops a turnaround strategy, but it’s too late.
The catalyst of all catalyst’s hits the world in 2020 and COVID swiftly kills Francesca’s who is forced to file for bankruptcy.
The simple story of FRAN is that COVID killed the company. But a deeper look indicates that management neglected underlying metrics for years. Efficiency metrics like sales per square foot and net margins shrunk for years. And revenues didn’t increase linearly with the total # of locations.
The true kicker was that in 2014 the company opened a stock repurchase program and repurchased $150M in stock over a 6 year period! It’s a true headscratcher for me as a growing company should be investing their earnings in growth, not in their own stock. And when the catalyst comes… $150M in cash would have been real nice to have chillin’ in the bank as their stores were forced to shut down.
Recent Insider Buying
Large Micro Cap Purchases
Top News of the Week
“JetBlue Will Dump Alliance With American To Save Spirit Deal” - By Suzanne Rowan Kelleher of Forbes
“Real Estate Stocks Are on Sale. Where to Find the Best Deals.” - By Bill Alpert and Neal Templin of Barron’s
Top Micro Cap Movers this Week
Top 10 Gainers
Top 10 Losers
Special Situation Watchlist
Activision Blizzard (ATVI 0.00%↑) - Risk Arbitrage
The spread between the buyout price ($95/share) and ATVI’s current trading price is now ~15%.
News Articles:
No news updates.
111, Inc. (YI) - Going Private Transaction
The non-binding offer has been upgraded from $3.61 to $3.66/share (see link for SEC filing)
The spread between the offer price and the current stock price is 38%
Albertsons Companies, Inc (ACI 0.00%↑) - Merger Arbitrage
The spread between the buyout price ($27.25/share) and the current trading price is now ~24%.
News Articles:
No new updates
*See links for the situation summary from prior editions
See you next week!
- Dark Side of the Street