Young Money - Why Value Investing In Tech And Retail Companies Doesn't Work

New post:

"To accurately value a business, investors need a guide as to what margins and economic returns it will earn. Past results are often the best guide: if an industry has earned a 10% average return on equity over multiple economic cycles, but it's currently losing money because of a recession or overcapacity, then it's likely to earn a 10% ROE again at some point. Some companies in the industry may go bankrupt, but when supply and demand adjust, the survivors will profit. In other words, the typical industry reverts to the mean.

By contrast, new technology standards and products replace old ones all the time. Instead of reverting to the mean, struggling tech companies usually revert to non-existence. The same is true for retail: what people like to buy and where they like to buy it change constantly."

Recently, many value investors have had to figure this out the hard way.

I don't understand the "Standard General" (ridiculous name) hedge fund guy who keeps sniffing around American Apparel and Radio Shack.

Millard Drexler: "Surround Yourself With People That Get It"

I posted a Mickey talk from April this year. This one was actually earlier, a couple years ago:



He's a character.

Color on Retail from Leggett & Platt $LEG

Link

"Leggett & Platt expects to record a $108 million pre-tax, non-cash goodwill impairment charge for the second quarter. This charge reflects the complete write off of the goodwill associated with the Store Fixtures group, which is part of the Commercial Fixturing & Components segment. The EPS impact of the non-cash charge is expected to be 65 cents per share. Apart from this impairment, the company has made no update to the underlying full year EPS guidance issued in April.

As previously disclosed, the Store Fixtures group's 2013 performance fell short of expectations. Performance did not rebound during the second quarter of 2014 as expected, with the deterioration of revenue and profitability most pronounced in May and June. Consequently, it has become apparent that the current market value of the Store Fixtures unit has fallen below its recorded book value. This stems from lower current expectations of future revenue and profitability, reflecting reduced market demand for the shelving, counters, showcases and garment racks the company supplies to major retailers."

A correspondent writes,

"just think about all the stores that are closing. If you are still in business, you are going to take whatever fixtures that can be removed without too much effort and put them in any other stores you might be opening or use for spares. Total retail space is going down. Full stop. These guys are just catching up with reality."

This is an interesting indicator. Here's more about the store fixtures group.

"Why Guy Spier Says Will Never Invest in Retail"

"I've always had the same impression as him, i.e. that retailing is a tough business where few of the players have a durable competitive advantage. A lot of retail CEOs who are successful at one retailer seem to flounder when they move to another retailer operating in a different market segment/environment."

Teen Specialty Apparel Retailers

NYT

Another factor chipping away at teenage retailers may be the shifting priorities among young people. Where clothing was once the key to signaling a teenager’s identity, other items may have become more important and now compete for their dollars.

“Probably the most important thing a teenage boy has is his smartphone,” said Richard Jaffe, an analyst at Stifel Nicolaus. “Second, is probably his sneakers. Third, maybe, we get to his jeans.”