Bare Escentuals: A Great Small Cap with Excellent Free Cash Flow

Sep.28.09 | About: Bare Escentuals (BARE)

On my way of finding the next equity to invest in for my portfolio, it was very difficult to find any candidates that meet many of my value requirements for a long term investment. But with the screening and initial analysis that I completed, I was able to come across a great small to mid cap company that has excellent free cash flow (FCF).

Bare Escentuals, Inc. (BARE) is a company with a market cap of just over $1 Billion and trades on the Nasdaq. While completing my value scorecard (see below), this company (like many others) has seen a decrease in sales and income due to the recession. What really stands out in this scorecard is the FCF of $79.3MM in the last twelve months, representing a FCF Yield of 12.1%. Adjusting for the recent stock appreciation, the FCF yield is 7.5%, well within the 2 times range of the 10 year T-Bill.

Presentation 1

With all of this support, I decided to enter into a short-term covered call trade of BARE. Here are the details of the trade that was executed on Sept 23rd, 2009:

Buy 100 Shares of BARE at $11.96

Sell 1 Oct 12.50 Call Option at $0.45

Commissions of $11.70

Net Cash Investment of $1,162.70

S&P 500 Level at the time of the trade was 1,060.87

If this executes, the strategy will return 6.5% in 23 days, hopefully creating some alpha. I will track this in my real account portfolio.

Disclosure: I hold the covered call position of BARE mentioned above.