Picking up a bargain in June

by admin on July 3, 2014

BedbathandbeyondIn June, shares of Bed Bath & Beyond (BBBY), one of the most efficiently run companies around, dropped by 5.7%. Year to Date, its shares have dropped 28.53%. This is one of those very rare opportunities to invest in a great company selling at a very good price. Price to sales is just 1.049 and price to tangible book value is 3.42, the lowest ratio over the past 12 months. Bed Bath & Beyond’s management has attributed the margin pressure to two factors. First, customers have become more price-sensitive, and are trading down to lower-priced items and using more coupons. Additionally, Bed Bath & Beyond’s costs are rising due to investments in a new technology infrastructure focused on improving online and “omnichannel” sales. To compensate for this decline and maintain EPS levels, BBBY has been buying back its own stock at a face pace. This is a fantastic commitment to investors that very few companies are willing to adopt. As you can see on the graph below, BBBY has been buying back shares constantly since 2010, and although the company doesn’t pay dividends, buying back stocks is another excellent way to return capital to investors. BBBY management is also committed to continuing these policies.

BBBY Chart BBBY data by YCharts

Despite another quarter of weak sales growth, I still think Bed Bath & Beyond is a good bet for value investors. The company’s management expects sales growth to strengthen later this year. There are also significant opportunities for adding new stores, like the ones they recently opened in Mexico in a joint venture with Home & More SA, and the ongoing expansion already taking place in Canada.  Bed Bath & Beyond’s technology investments also have the potential to drive a significant acceleration in online sales over time, and significantly improve efficiencies and operating margins.

Additionally, it is important to note that Bed Bath & Beyond has financed the entirety of its expansion with its own money, and has no debt.

For all of the above reasons, I just couldn’t resist scooping up some shares of this company at the current price. Based on historical valuation, I believe BBBY shares have an upside potential of at least 30%

Summary Portfolio Performance

Since inception (01/19/12), the model is up 50.0%, versus the S&P 500 up 58%. The return of the S&P 500 in June 2014 was 2.1%, as compared with 1.96% for my Dividend Paying Large Caps portfolio. Year-to-date my portfolio is up 1.34% as compared with 1.01% for the S&P 500.

In June, Intel (INTC), Lukoil  (LUKOY) and Ralph Lauren (RL) all performed very well. They were up 13.1%, 5.8%, and 4.7% respectively. The stock that hurt my portfolio in June was Oracle (ORCL), which declined -3.5%. However, I’m not concerned about this decline, the company remains very strong and its shares are up 6.55% year to date. In June the company made a large acquisition: MICROS Systems (MCRS) for $5.3 billion ($4.6 billion in net cash). Oracle has spent the last few years dogged by increased competition from companies such as SAP (SAP), Salesforce.com (CRM) and Workday (WDAY). The company has been criticized for not moving aggressively enough to capture more market share, and its large size has created many layers of bureaucracy, slowing things down for the company. Oracle products and services complement MICROS’ existing products and services for the restaurant industry. Additionally, MICROS Systems is a smaller company that has been able to move faster and adapt more quickly to changing customer demands and business constraints. By harnessing Oracle’s massive size and existing technology, MICROS Systems will be able to grow faster and contribute more to Oracle’s overall strategy and growth. MICROS is particularly strong in online ordering, reservations, inventory management, and workforce management. The company’s products also cover a wide range of solutions that Oracle’s current solutions do not such as kitchen management, table management, enterprise operations, and point-of-sale. This is an acquisition that I am very happy about.

Acquisitions in May 2014

In June 2014, I added two positions to my portfolio. Bed Bath and Beyond (BBBY), an opportunistic addition of a currently undervalued company, and Google (GOOG).  Google is by far the best technology company in today’s world. I am very excited to see what Google is doing with Google Flights, Google Hotels, driverless cars, Google Fiber, Google Loon and Google Play. I think Google is a company with an incredible business model and approach to innovation that will continue to expand, very difficult to replicate.

Liquidations in May 2014

I closed two positions in June because I found better opportunities in the market.  While I think these companies were worth holding, I found on BBBY and opportunity that I couldn’t pass up. The positions I liquidated in June were Aflac (AFL) and JP Morgan (JPM). I have no plans to add any new positions in July.

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