Tuesday, November 23, 2010

J. Crew sells itself - fashionable and inexpensive

Today it was announced that J. Crew(JCG) is being sold to two private equity firms. Whoopee, I should be saying, having purchased a reasonably sized position in the stock on November 12 for $34.03 a share and now receiving $43.50 a share on November 23, over a 30% gain in less than 2 weeks. I'm not complaining but as a long term investor my view was of JCG having a market beating return over several years at least.

I had done the analysis. First the research came to me in the form of a New Yorker profile of Micky Drexler, the CEO of J. Crew. Really interesting and he wears my favorite dress shoes every day, and stocks them at the stores. The starting point of my research was asking my daughters(bought Lululemon Athletica(LULU) in early September at 33 with this first step, LULU now 54). The older one had just bought a terrific casual jacket at J. Crew at a discount price. It looks great on her. She gave me a catalogue. I looked almost solely at the men's stuff which is by no means even remotely an expertise but surely way beyond anything in the women's section. This phase of the investment thought process made me really want to like the stock.

The next part was the financial analysis. Everything looked solid. Revenue was growing, earnings too, and no issues with the balance sheet. Then came the stock price analysis. JCG had traded to a level of 50 in May of this year, doing the retrace from the debacle that bottomed in March '09. The company expressed concern about the softness of the consumer recovery in the late summer and the stock slid to a low of 30 in October. It was just building some momentum for a recovery from a market overeaction.

And the final part, I went to a store in Manhattan. The service was there, some customers too, and the thoughtfully stylish, carefully chosen, quality products at decent prices, not cheap but not wasteful for the quality, all came through. The locations have not been fully built out in the U.S. yet. The website seems ready to sell the customer anything as well.

I wanted to buy the stock immediately but waited a few days and then hit it. My own little personal price target was, without some major interference from the economy, that it was back to 50 by May. So today's announcement was rewarding but I was looking forward to having my own little ownership interest for a much longer time.

Afterword in fairness - 2010 has been a good year for stock picking given that the volatility presents opportunities. I do make some not too bright mistakes of course, so here are two.

I bought Dreamworks(DWA) six or seven months ago based on the advice of a newsletter I follow. Since this same newsletter convinced me to jump into Netflix(NFLX) in January(zoom) I tended to pay attention. Bought DWA at 39, within a month it was at 31 so I added more. It fell further to 28 and now thankfully it is at least back to 31. I did minimal research, saw good management, and an extremely strong balance sheet. In fact I had no idea what I was buying. DWA is only the animated films and related products and I was thinking Band of Brothers and The Pacific, things that I understood. Red faced when no one was even around when I learned that.

Several years ago I had made money on a trade in Broadwind Energy(BWEN). At that time I had bought it at 4 but then sold at 8 when I saw Jim Cramer recommend it in his know it all way. Earlier this year it was down to 4 again so I jumped in. I saw that revenues were struggling and they were losing some money but also saw that they had modest debt and at least two years worth of capital to burn if they kept losing money. When does a green energy windpower company go bankrupt - worst case scenario someone buys them. The stock then moved down to 2 over several months so I doubled up. Why not. Because now it's at 1.62. Why? Listening to an interview with Boone Pickens a few days ago I learned that natural gas is so inexpensive now that wind power cost more that twice as much and of course has build out challenges while the gas pipeline infrastructure is well in place. Windpower may be green but so is money. I did no research on the overall energy market. There was a reason that the stock was low.


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