Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
INTERVIEW: Hard Times Ahead at the Mall by Sandra Ward
Summary: Barron's interviews Shawn Kravetz, who runs Esplanade Capital, which has earned 16.6% after fees over the last five years. Key points:
- Normally a retail bull, Shawn's underexposed to the sector because he foresees a slowdown in consumer spending if interest rates rise and people spend their spare cash to keep a roof over their heads. He likes Tween Brands Inc. (TWB), which does business under two names: Limited Too is "the most unheralded specialty-retailer growth story out there." Square footage will rise by 5% over the next couple years, and operating profits are 20%. Its smaller brother, Justice, has only 184 stores to Limited's 570, but it's opening another 100 this year, and will contribute 1/3 of earnings by 2008. Shares ($41) should climb towards $54-60.
- Solar is a huge growth area, up 50% in 2006 and likely another 50% in 2007. Evergreen Solar's (ESLR) String Ribbon technology allows solar manufacturers to use less silicon (of which there is a severe shortage), giving it a 20% cost advantage. As earnings grow, shares ($8) could hit $15-25 on increased earnings, share buybacks, and a possible buyout.
- Investors are focused on PayPal's (owned by eBay Inc. (NASDAQ:EBAY)) web payments, and assume that Western Union's (NYSE:WU) business is doomed. But many WU customers don't have web access, and margins on WU's business are stellar. At 17x 2008 earnings, the stock "is just too cheap."
- Amazon.com's (NASDAQ:AMZN) current value is excessive; Kravetz is short the stock. To make it cheap, margins would have to triple, which is unlikely considering the ease of online price comparison.
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