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Stock Musings

|About: Fred's, Inc. (FRED), GE

Summary

Beaten-down stocks can present interesting opportunities.

But will companies focused on cost-cutting maintain their dividends?

Two stocks catch my eye as of October 27, 2017: Freds, Inc. (FRED) and General Electric (GE).

I've never set foot in a Fred's. The stock closed at a meager $4.77/sh on Friday, breaking the psychologically important $5/sh mark. Its inventory numbers seem high, and it's not doing a good job calling in receivables as quickly as possible. While Dollar General (DG) and similar stores have prospered, especially in America's Midwest, Fred's never seemed to capture the magic formula. Nevertheless, at below $5/sh, Fred's seems like a value play. Alden Global Capital has made a substantial investment and appears to be holding major losses, but its presence could spur activism and perhaps break Fred's out of its complacency.

General Electric stock closed at $20.79/sh on Friday. The last time GE's stock saw such levels was in 2012. With a new CEO determined to turn the company around and already in cost-cutting mode, GE seems like a potential buy on weakness. 

Disclosure: I own GE and FRED stock. My positions may change at any time. Nothing herein constitutes investment advice or a recommendation to buy or sell any security. You are responsible for your own due diligence. 

Original link: https://willworkforjustice.blogspot.co.uk/2017/10/stock-musings.html 

Update on December 6, 2017: FRED released earnings before the market open, and the stock declined over 20% to 4.02/share. When I started buying the stock, I felt as if two options existed: 1) bankruptcy; or 2) a buyout. Seeing Alden Global Capital continue its involvement concerned me because of Alden's history with companies post-bankruptcy re-organization. In this case, despite its declining revenues and stock price, FRED has openly and consistently stated its desire to increase its footprint. Given recent developments, I speculate a buyout seems more likely now than bankruptcy. 

More specifically, the writedown for inventory is significant and addresses my primary concern of financial misstatements due to overinflated inventory. The dividend cancellation is harsh but also indicates neither the company nor Alden is steering Fred's into bankruptcy in order to cash in on the bond market. As such, I have bought more shares today. As always, my positions may change at any time. Nothing herein constitutes investment advice or a recommendation to buy or sell any security. You are responsible for your own due diligence. 

Update on February 5, 2018: I am continuing to average down on both GE and FRED. My timeline is one to three years on FRED and 10 years on GE. I am speculating on a GE breakup (or at least spinoffs similar to HP and Agilent in the past) and on Alden Global Capital taking FRED private or promoting a buyout. 

Update on May 14, 2018: FRED recently declined to about 1.60/sh and today jumped to 1.92/sh. It's my worst investing mistake so far. Once a company cuts its dividend completely, it's usually time to jump ship. My mistake post-Trump was sincerely believing the country would direct investment into smaller regions where much of Trump's base resides. In reality, we are seeing tax reforms that handicap smaller enterprises and M&A that prioritizes existing market leaders.

Disclosure: I am/we are long FRED, GE.