1) It seems like every investor on the planet is piling into anything related to artificial intelligence, especially semiconductor chip stocks...
But as always, my team and I are focused on the beaten-down stocks of boring but high-quality companies – looking for babies thrown out with the bathwater.
I took a first look at one such company on April 23 – Italian luxury-goods maker Prada.
Shares trade primarily on the Hong Kong Stock Exchange with the ticker "1913." It also trades on the pink sheets in the U.S. with the ticker "PRDSF."
In addition to its namesake brand, it owns names like Miu Miu, Church's, and recently acquired Versace. It designs, manufactures, and distributes its products in more than 70 countries.
After analyzing its financials and valuation, I concluded:
I really like what I see here. Prada is a high-quality business with strong financials, yet its stock has been cut in half, resulting in very low valuation metrics on both a relative and absolute basis.
The company hit my radar again when analyst Eden Bradfield wrote favorably about it in a recent Substack post.
He began with an insightful overview of the luxury-goods sector:
You may think I am down on luxury from all this doom and gloom. Not so. I just think the dynamics have shifted and this presents a new dichotomy. You could put it this way:
1). Giant "factory" luxury no longer works
2). "Luxury for everybody" doesn't work
3). The industry is now in a state of divestment: it's no longer an acquirers' gameAs [Charlie] Munger would say, why not invert it? What's likely to do well?
1). Smaller houses with a focused brand + message
2). Companies with a moat that is beyond a single designer
3). Companies with a smaller footprint of stores
He then highlighted two names that he thinks meet the latter criteria – Swiss holding company Compagnie Financière Richemont (CFR.SW) and Prada.
Richemont is an outstanding company that owns dozens of top brands, including Cartier, Van Cleef & Arpels, Buccellati, and Montblanc. Its stock has done well and trades at a rich 28 times this year's earnings estimates.
Prada's stock, on the other hand, is in the doghouse. It's down by nearly 50% in the past 15 months, as you can see in this five-year stock chart:
Bradfield agrees with me that Prada's stock looks very interesting here, writing:
[It] trades at around 12x earnings and has a focused and loyal following with both Prada itself and Miu Miu; they did not fall into the trap of Louis Vuitton and dilute the brand too much. It's also, you know, cheap as chips. It trades like it's a mid-level retailer in Ohio. The market has not priced in the recent Versace acquisition, either, which I think is a mistake – Versace has tons of brand recognition and has suffered from poor management in recent years. If what Prada group has done with their houses is any indication I'm fairly optimistic the company could turn Versace's fortunes around.
For further insight, I found a pitch for the stock from January 20 on my favorite stock idea website, Value Investors Club, by user "CapeEdge" (only members can view the full post).
They begin by laying out their thesis:
The company owns two of the best recognized brands in the industry, Prada and Miu Miu, and has recently acquired a third, Versace. We believe a variety of factors have come together to result in the company currently being offered at a deep discount, trading well below peers and its own trading history. We see multiples ways to win, but the core thesis is rooted in our expectation that upcoming earnings releases will dispel investor concerns about a reversal in Prada brand's fortunes, the sustainability of the Miu Miu revenue base, and the extent of losses incurred from Versace. If the multiple remains depressed, we see other catalysts in a potential dual-listing in Milan, a take private by the controlling family, and successful execution of various growth opportunities that are being pursued.
CapeEdge then addresses the three main factors weighing on the stock – first, an expectation that the "fashion pendulum" is swinging back from "quiet" to "loud" luxury:
The attribution of Prada's outperformance in recent years solely to "quiet luxury" is lazy. The group has been a better steward of their brands than much of the industry, reflected in their focus on full-price sales and their own retail channel (90%+ of sales), vertical integration of their supply chain, and strong digital marketing performance. These outcomes are no accident, as the brand itself only recently re-emerged from a substantial turnaround process, after various missteps in the distant past led to meaningful market share losses in 2014 to 2018. We believe recent outperformance of the brand since ~2021 has more to do with this process than shifting fashion trends.
Second, there are questions over the sustainability of Miu Miu's newfound popularity:
Miu Miu has delivered extraordinary growth over the last few years, more than tripling revenue over 3 years and now accounting for a third of total retail sales. Of course, this gives rise to concerns around the sustainability of this growth. We believe these concerns are overblown. An analysis of alternative data sources (website visits, search interest, social media) portrays a steady grind higher over this period, rather than the dramatic short-term peaks and troughs that are normally seen with fads. This is the result of a 3- to 4-year turnaround journey, and supported by an expansion of product categories, geographical store footprint, a re-focused creative direction, and more effective digital presence.
Lastly, investors are skeptical about the Versace turnaround:
Prada management has indicated that a turnaround will not be quick, taking at least another 18-24 months. We expect the brand is likely to continue generating losses for another ~two years, as a turnaround might require a cut-to-grow approach e.g. reducing the outlet sales channel (26% of retail store fleet), which is brand dilutive, but highly profitable. While this will depress earnings over the short-term... we believe investors will become comfortable with viewing the investment on a standalone basis (i.e. sum-of-the-parts analysis), as losses are unlikely to endure...
Management has shown their ability to turn around a struggling brand – most recently with Miu Miu – and we believe a similar playbook could work for Versace.
CapeEdge concludes:
As noted, our core thesis remains that upcoming earnings releases will dispel investor concerns around a reversal in Prada and Miu Miu's recent outperformance, as well as provide clarity on the losses that will be incurred to stabilize and return Versace to breakeven. Other potential catalysts include: A dual-listing in Milan has often been mooted as a value unlock strategy... A depressed share price raises the possibility of a buy-out by the family (potentially then followed by a Milan relisting).
I think Bradfield and CapeEdge make compelling cases that this is an excellent company with a bright future that has suffered short-term setbacks.
The stock has only gotten cheaper, making it even more interesting to me – it's down 15% since the Value Investors Club post.
And analysts estimate that the company will earn $0.36 per share this year, meaning it's trading at 12.5 times earnings – close to its all-time low.
That's also true of another metric – price to next-12-months estimated cash flow per share, which is 7.05 times today. That's less than half its long-term average of 14.6 times, as you can see in this chart:
My team and I at Stansberry Research are looking closer into Prada. If we decide it's time to buy, as always, Stansberry's Investment Advisory subscribers will be the first to know. You can become one by clicking here.
2) Greetings from somewhere between Dresden, Germany and Kraków, Poland! I'm part of a group of 60 people (including my parents who flew in from Kenya, my sister, and three friends) driving 50 ambulances to Ukraine. How I got here is quite the story...
A month ago, a mutual friend introduced me to a wealthy philanthropist who told me he'd given a substantial amount of money to a wonderful charity called Ukraine Focus. It buys inexpensive, used ambulances (costing $10,000 to $15,000 each) all over Europe.
Then, when it has purchased a critical mass, it organizes donors and volunteers to drive them to Kyiv. They're then given to Ukraine's Territorial Defense Forces in a beautiful ceremony like the one pictured here:
The philanthropist told me he was joining the next mission, departing from Frankfurt, Germany on May 19. The timing worked perfectly, since I was already in Europe. So I extended my trip by three days and flew from Venice, Italy to Frankfurt (with a 19-hour layover in Belgrade, Serbia – see pictures in yesterday's e-mail).
I met up with my family and friends yesterday morning, and we drove five hours to Dresden. As you read this today, we're driving six hours to Kraków. I then have to fly home tomorrow for a family event this weekend, so my seventh trip to Ukraine will have to wait.
My parents, sister, and friends are going to have a great adventure! (And, no, sending them into a warzone is not a plot to accelerate my inheritance! Western Ukraine and even Kyiv are quite safe, especially the roads.)
If you'd like to donate to Ukraine Focus, you can do so here. And if you want to join the next mission, which will be in late August or early September, e-mail volunteer organizer Carol Cummings at carol@ukrainefocus.org.
Here are some pictures from our first day:
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.