The Long and the Short of It
By Michael Hlinka
When it comes to buying individual equities, the thing I hate to hear is that the company is a “good story”. Now, I like a good story as much as the next guy – that’s why I go to movies and real novels. But when I’m investing in publicly traded corporations, I’m looking for entities with a proven track record and sound financials. For that reason, my first long selection is Big 5 Sporting Goods Corp (NASDAQ: BGFV, Jan 31st/23 close $9.99) and my first short selection is Peloton Interactive Inc (NASDAQ:PTON, Jan 31st/23 close $12.93).
BGFV is a sporting goods retailer that was founded in 1955 and went public in 2002. It operates 431 stores in 11 western states, with California accounting for 222 of them. BGFV reported its 2022 year end a couple of weeks ago and the results weren’t great, particularly compared to 2021. Net sales were down year-over-year by 16% and its EPS plummeted from $4.55 to $1.15. But in my opinion, both 2021 and 2022 are outliers: Given what BGFV does, it should never have earned $4.55 nor $1.15. Something around $2.00 per share is realistic once the ship is righted.
There are two other good reasons to be bullish on BGFV. Its clean book value per share exceeds $12 and there’s no debt. That means it’s costing you less than ten bucks to buy something that could only be replicated for a 25% premium. Then there’s the dividend: BGFV has recently been paying $1.00 per year which provides a yield north of 10%! Put all of this together and this looks like a prime take-over target, either by an existing publicly traded company like DICK’S Sporting Goods Inc, or even more likely, a private equity player.
Moving on, the contrast between BGFV and PTON couldn’t be starker. PTON was founded in 2012 and was a market darling during the COVID lockdowns. From its public debut in 2019 at $20 per share, it rocketed to peak at $160 exactly two years ago. PTON’s year end is June and from July 1st 2021 through June 30th, 2022, it burned through $2 billion in cash in its core operations. In 2021, it doubled its sales compared to the previous year and still lost money! But the darkest cloud on the PTON horizon is its capital structure, and specifically the $1 billion in debt that’s coming due in February 2026.
Let’s go back to February 2021. PTON borrowed $1 billion and paid 0% interest on those funds. This is not a typo. These were convertible debentures, with the conversion price set at $239.23. In the most recent quarter, PTON burned through $315 million in cash, and I would be shocked if it turns cash-flow positive any time soon. The market will figure it out sooner or later and shareholders will soon realize that the best strategy is to get out as soon as you can.
Bottom line(s):
- 2-year price target for BGFV: $20.00 (currently $9.99)
- 2-year price target for PTON: $2.00 (currently $12.93)