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I originally published this piece on March 20th, 2021. It was a bullish piece on why I was investing in retail companies coming out of COVID-19. At the time I was buying these beaten up retail companies hand over fist. It was an incredible opportunity.

Going back and re-reading this piece is eye opening and posts a similar story with what is happening now. Retailers are not as cheap as they were one year ago, but they are still pretty cheap. And the entire industry has been sold off due to renewed COVID fears combined with higher supply chain costs.

I thought it would be good to send this piece out to everyone again (90% of you will get this for the first time as you were not subscribers then). The message is still clear as the original statement. The retail sector was a slam dunk for 2021 and currently is a slam dunk for 2022.

Costs have been massively cut. Anyone who has survived is experiencing significant operating leverage. And the supply chain issue will work itself out. One year from now I would bet most retailers will have added a ton of cash to their balance sheet and start giving back capital to investors through share buybacks or repurchases.

The Retail Sector Is A Slam Dunk Investment for 2021 2022, Here's Why

During the great crash in March of 2020, everyone who claimed to be long-term investors, took a short-term view and dumped equities. Stocks fell and valuations crumbled. No one could see past the next few years, let alone the next few days without panicking. Volatility became everyone’s greatest fear. But for investors who focused on the big picture, volatility was not a risk, but an opportunity.

The play during the initial crash was to buy companies that would benefit from the entire world being locked down. Stay at home tech stocks were the kings of early 2020. The theme was simple, tech stocks that could improve your life during a lockdown would grow revenues and perform well. This included Peloton (no gyms), Zoom Technologies (no in person meetings), Netflix (nothing to do outside), Amazon (shopping online), and many others.

Then the fear stocks rallied along side the civil unrest and riots seen in the United States. Ammo and guns flew off the shelves. Mace spray saw the highest level of sales in decades. Companies like Sturm, Ruger, & Co., Vista Outdoors and Smith and Wesson saw a massive amount of new investor interest.

As spring and summer approached the economy was still locked down. Your favorite restaurant was likely shuttered. Any public indoor activity was non-existent. If you wanted to do anything, it had to be an “individual” outdoor activity. Beneficiaries of this were bicycle manufacturers, active wear, sporting goods stores like Dick’s or Cabela’s, and camping suppliers. In addition, people were spending more time at home than ever before. Anyone who sold furniture or home goods absolutely killed.

During the late months of 2020 the COVID-19 vaccine was released. The thematic thesis immediately changed. Companies that would benefit from a reopening of the economy started to outperform. Movies theatres, retailers and travel stocks skyrocketed. Any company that was beaten down throughout 2020 began to see life.

With COVID-19 all but over, many sectors have seen an almost complete recovery if not more. In most cases, the market is efficient. There is an old economic adage along the lines of, “if you see a $100 dollar bill on the street don’t even bother picking it up, because if it was real it would have already been taken.”

For large, well known companies, the market is completely efficient. When new information is available, institutional investors will adjust their models - resulting in price adjustments for a given security. For smaller, illiquid and less known companies, the market takes longer digest information. This gives an astute, fundamental investor a tremendous amount of opportunity.

The next big thematic play will be beaten down micro and small cap retailers. In my opinion, these beaten down retailers trading at multi-year lows are layups - absolute slam dunks for 2021.

Any retailer who has survived this long will likely survive, if not thrive throughout the remainder of 2021. The worst is behind them.

Throughout the entire pandemic, retailers have been focused on one thing, cost cutting. Rents have been renegotiated. Employees were furloughed. Corporate and board salaries slashed. Inventory purchases on hold. And the ones who were profitable in prior years are likely receiving and income tax payment from the Federal Government in the next two months - which will enhance their liquidity position.

It’s 2008-2009 all over again. For those who weren’t around, or don’t remember, retailers slashed costs dramatically during the Great Recession. It was a game of survival. If you didn’t cut costs you were dead. Shuttered and closed. But the ones who were able to cut costs enough to survive the Great Recession, thrived in the recovery.

The same thing will happen here. Revenues will come back - and they will come back faster than you think. There is a significant amount of pent-up demand for new clothes. People don’t want to wear the sweats they have been wearing all year anymore. They want new clothes. Nice clothes. Clothes that they won’t associate with being locked up. People want to go out to parties and dress up.

And given that a significant amount of retailers have closed shop for good, the ones who have survived will absorb all of this demand. All of that stimmy demand that was injected into every American household.

If you read through the transcript of any retailer who is still around, most will say costs are not coming back. These guys are blatantly stating as revenues return they don’t plan on bringing costs back into the equation. This equates to one thing, significant operating leverage.

Not only will these retailers likely generate strong free cash flow as revenues return, but they will be comping against 2020 numbers. EVERYONE IS GOING TO POST HUGE REVENUE INCREASES ALONG WITH STRONG FREE CASH FLOW.

I’ve identified a half dozen small and microcap retailers who have yet to be recognized by Wall Street, but have a strong chance of outperforming. Most still trading at multi-decade lows. Gone and forgotten.

I recently highlighted one retailer that I think could be a 2-4 bagger over the next few months. And I plan to release another research report on another forgotten retailer early next week that I think is an easy double.

If you want to learn more about investing click the subscribe button and shoot me an email. I’d love to chat and talk shop sometime.

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