History can be an investor's best friend... The fall (and recovery) of an iconic brand... New dressing rooms were not the secret to success... How not to panic when staring 'into the abyss'... Meet Wall Street veteran Berna Barshay...
Editor's note: Today we're excited to share a guest essay with our Digest readers from Berna Barshay, an editor and analyst at our corporate affiliate Empire Financial Research.
Berna, whom we introduced to you over the weekend in our Masters Series, writes the excellent (and free) Empire Financial Daily e-letter. If you don't already subscribe, you absolutely should.
As someone who also writes on a daily deadline, I (Corey McLaughlin) am constantly blown away by the depth of the work Berna produces on a variety of topics every single day. Her readers are blown away as well, based on the feedback we've seen.
But we probably shouldn't be surprised... As we noted over the weekend, after being educated at Princeton University and Harvard Business School, Berna spent roughly 25 years on Wall Street. She worked for financial titans Goldman Sachs, Sanford Bernstein, and Swiss Re.
Berna is also a longtime friend of our colleague Whitney Tilson, who recruited her to join him at Empire Financial Research in April 2020... In introducing Berna to readers after she joined his team, he explained why – calling her a "talented, stone-cold-moneymaker." And he continued...
I know a lot of people with fancy degrees who blew up in 2002 and 2008 as the Internet and housing bubbles burst. But not Berna – she made money both years!
How has she been so successful? Well, she's smart, experienced, and rational, to be sure, but so are a lot of folks. But she has one thing few others do in this industry: she's a woman! And she focuses on sectors in which 80% of consumer purchase decisions are made by women, yet over 90% of investment decisions are made by men. Berna is going to be exploiting that gargantuan market inefficiency for Empire Financial Research readers.
Now, Berna is getting set to launch her first paid newsletter as part of a special event she's hosting, alongside Whitney tomorrow afternoon. It will begin at noon Eastern time.
Together, Berna and Whitney will reveal a "hidden" corner of the market that they say could supercharge your portfolio... and discuss three stocks they believe every investor should buy immediately.
The event is free. If you're interested, you can reserve your spot in advance right here.
Meanwhile, in today's Digest, you'll get a sense of Berna's expertise as she shares one timeless way investors can find an edge in the markets... and how she was able to see the real reasons behind the fall – and recovery – of an iconic American brand that most other folks missed.
With that said, here's Berna...
Following a company for years can be an invaluable asset for beating the market...
If you have a long memory of a company – and know its history and management inside and out – it's a lot easier to swoop in when a great buying opportunity presents itself.
I (Berna Barshay) have been watching many companies for more than two decades now. One that might sound familiar to you is L Brands (LB). It's the parent company of lingerie giant Victoria's Secret and Bath & Body Works, a mall retailer of soaps, candles, and other home fragrance products.
As I explained in the May 22, 2020, Empire Financial Daily, Victoria's Secret was at a time considered one of the best specialty retail businesses in the world. It had dominant market share within the lingerie category in the U.S., near-universal brand recognition, and exceptional, industry-leading margins thanks to both its scale and its pricing power.
After many years at the top of its industry, Victoria's Secret started to stumble. It saw revenue growth slow considerably in 2016 and eventually turn negative in 2017. Operating margins dropped.
As performance declined and the stock fell, many investors tried to justify the company's fall from grace.
Some attributed the chain's troubles to a fashion trend toward "bralettes"... a kind of wireless bra that was taking a bite out of the market for the sexy push-ups that Victoria's Secret was famous for.
But I could tell that something bigger was going on...
Something was off in the company's decision-making. In a move I still don't understand, management voluntarily exited its swimwear business in 2016.
Victoria's Secret had been one of the top destinations for regular women seeking affordable, full-coverage bikini tops. Women who visited every year for swimwear would also end up buying underwear, sleepwear, or other products. Swimwear was a gateway deeper into the brand for many customers. I never heard the company offer a good defense of this decision... and now, five years later, Victoria's Secret is reentering the swimwear category.
Other signs of poor judgment continued, including a lack of diversity in the models featured in advertisements. The millennial and Gen Z customers that the chain sought expected – in fact, demanded – a more inclusive vision of beauty when it came to race and size. Management didn't recognize that cultural change was happening... or if it did, it refused to acquiesce.
By the end of 2018, Victoria's Secret was widely lambasted in the press for its out-of-touch marketing. Its overtly sexy imagery and narrow definition of beauty quickly went from anachronistic to offensive as the #MeToo movement took hold.
The company's missteps at that point were widely understood... and as a result, LB shares fell nearly 75%, from a high of more than $100 in 2015 to around $25 by the end of 2018...
L Brands was a classic value trap all the way down...
People saw the strong historical margins and thought that the problems were temporary. Investors expected a reversion to the mean – that the company would go back to performing as it had for so long.
They figured bralettes would fall out of style and push-ups would come back... They anticipated that the next marketing campaign or set of products would turn it all around. My male colleagues (who I assume never wore a bra in their lives) would tell me a business-reviving product line was just around the corner... because that's what the company told them.
At one point, I remember the declining same-store sales were attributed to changing rooms that were in desperate need of a refresh, which Victoria's Secret was in the process of doing.
At that time, a male friend and analyst sent me into a store to check out one of the new, renovated dressing rooms. While he waited on a rainy street corner for me, I checked out the fitting room. Spoiler alert: The new wallpaper, though nice, wasn't going to fix Victoria's Secret's problems.
Back when Victoria's Secret was putting up peak operating results, it had an exceptional handle on the zeitgeist. I remember those years well. It knew what women wanted, aspired to be, and believed in. Over time, women's aspirations changed... but the company didn't.
By 2019, the source of Victoria's Secret's woes was no mystery...
But at that point, most of Wall Street had left it for dead.
After recognizing that something was broken and avoiding the value trap all the way down, I started getting super excited about the stock as having deep value in 2019.
I knew that L Brands' other asset – Bath & Body Works – was a true gem... And as LB shares continued to sink deeper into the $20s, the value ascribed to Victoria's Secret rapidly approached $0.
Some people thought that was correct and the lingerie chain was beyond repair. But having covered the company for 20 years and having been a customer at different points for 30 years, I felt Victoria's Secret wasn't a lost cause.
Bras are one of the toughest apparel categories to size and source properly, and Victoria's Secret still had huge scale and experience advantages. Due to its longtime position as a top retailer, the chain also had excellent locations within malls, and the continued strong performance of Bath & Body Works – and the sheer number of stores between the two – gave L Brands a lot of sway with landlords.
I also believed in the power of nostalgia in branding... I had seen Tapestry's (TPR) Coach, Puma (PUM.DE), and Kering's (KER.PA) Gucci rise from the ashes of near obscurity to periods of high growth and category dominance with a change of marketing or a new design team... With brands, legacy matters.
My qualitative judgment told me that if it were properly managed, Victoria's Secret was salvageable. My quantitative analysis told me that at points, the price of LB shares suggested that the lingerie chain was worth nothing – or worse, had negative value, despite nearly $7 billion in annual sales... I sensed an opportunity.
The COVID-19 pandemic actually handed L Brands a huge win...
Just prior to the outbreak of COVID-19, L Brands agreed to sell 55% of Victoria's Secret to private-equity firm Sycamore Partners in a deal that valued the company at around $1 billion. I thought it was the steal of the century.
Then COVID-19 hit, and Sycamore walked away from the deal last May.
It was an awful time for retail, not to mention the rest of the world.
But nothing had permanently changed at L Brands... And in fact, for the first time, I was seeing a shift in its marketing to be more inclusive and welcoming to diverse customers.
It was at this point that I highlighted L Brands in Empire Financial Daily as a good buy for long-term investors tolerant of a little volatility. Having followed the company for so long, I could see subtle "green shoots" at Victoria's Secret. And I understood what a great business Bath & Body Works is... and how little investors were paying for Victoria's Secret when you stripped the value of its sister chain out of the price of LB shares, trading for just $15 at the time.
Now, let's fast-forward a couple of quarters...
As expected, Bath & Body Works minted money during the pandemic, selling soaps and hand sanitizers... and Victoria's Secret is finally turning things around. Product and marketing improvements have led to "less bad" sales declines while operating margins have exploded.
L Brands plans to spin off Victoria's Secret by August to create better transparency and unlock value in Bath & Body Works and Victoria's Secret. They will become two separate publicly traded companies, still owned by L Brands, and expectations now are for Victoria's Secret to fetch more than $4 billion... four times what Sycamore balked at paying a little more than a year ago.
Things are looking up, and the shares have climbed roughly 325% since the first time I told readers about LB...
Avoiding the value trap on the way down was hard. Staring into the abyss at the bottom was harder.
But having followed the company over two decades, I had the context and confidence to avoid losses... and to jump in when the stock was ready to rip higher.
Tomorrow afternoon, I'll break down how to find more of these triple-digit wonders...
In a free event that will begin promptly at noon Eastern time, I'll be joining my colleague Whitney Tilson for Empire Financial Research's first-ever Wealth Accelerator event. During the broadcast, we'll explain how you could begin collecting a long string of triple-digit gains, starting with as little as a few hundred dollars.
It's a chance to accelerate your wealth by taking advantage of an opportunity that most investors overlook completely... and it has nothing to do with options, cryptocurrencies, or any other complicated investment strategies.
This event is 100% free to attend, but make sure to reserve a spot in advance... You can do so right here.
Former Trump Adviser: Inflation 'Tsunami' Is Coming
Stephen Moore, former economic adviser to President Donald Trump, is warning of an inflation storm cloud on an otherwise-sunny economic outlook. Hear all the details in this interview with our editor-at-large Daniela Cambone...
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.
New 52-week highs (as of 6/8/21): Automatic Data Processing (ADP), American Express (AXP), Blackstone Mortgage Trust (BXMT), Richemont (CFRUY), Colony Capital (CLNY), Commvault Systems (CVLT), Dropbox (DBX), Western Asset Emerging Markets Debt Fund (EMD), Eagle Materials (EXP), Huntington Ingalls Industries (HII), Intuit (INTU), Cheniere Energy (LNG), Lonza (LZAGY), Motorola Solutions (MSI), MasTec (MTZ), Annaly Capital Management (NLY), Nestlé (NSRGY), Novo Nordisk (NVO), Invesco S&P 500 BuyWrite Fund (PBP), VanEck Vectors Russia Fund (RSX), United States Commodity Index Fund (USCI), U.S. Concrete (USCR), Victoria Gold (VITFF), and Washington Real Estate Investment Trust (WRE).
In today's mailbag, feedback on Kim Iskyan's Tuesday Digest about an economic "skeleton key"... Do you have a comment or question? As always, e-mail it to us at feedback@stansberryresearch.com.
"Kim Iskyan's piece was one of the most thought-provoking and disturbing articles I have read in a long time. For years, I have been banging the 'curb immigration' drum. This, in spite of the fact that my great grandparents on both sides came the America in the 1870s. They were part of the great story of the ascendency of this country. But I never understood that. Thank you, Kim, for opening my eyes. Maybe I should have had three children, instead of two...
"At almost 69 years old, the full effect of the situation may not seriously impact me, but I shudder to think about what it will mean to my grown children and my almost two-year old granddaughter. Thank you, Kim, for the education." – Paid-up subscriber Eric A.
"The last statement by Kim at the end of his article: 'Europe, where declining populations and weak economic growth – and poor stock returns – are increasingly the norm.'
"And are Europeans bemoaning their standard of living and are they clamoring to emigrate to the US?
"Be thankful that the developed world is experiencing a demographic transition to reduced fertility and even negative population growth. And hope that Africa especially south of the Sahara also rapidly progresses through the demographic transition before their population growth creates even more massive starvation and plague.
"To clamor for persistent population growth to gain economic growth is idiocy! Much of human history is of privation and war, engendered by population growth that exceeded the economic growth rate thereby shrinking the per-capita standard of living. Are our memories so short that we have forgotten that in both WWI and WWII the war goal of Germany was Lebensraum (living space), not unlike most wars and invasions of the past?
"In a purely statistical sense, GDP growth is a meaningless goal... what a poorer nation needs is GDP growth per capita. And what most nations need is a relatively equitable distribution of their production and wealth." – Paid-up subscriber Kendrick M.
Regards,
Berna Barshay
New York, New York
June 9, 2021