Post Forced-Selling Recovery – 30%+ upside
Andrew Walker from Yet Another Value Blog has recently covered this interesting event-driven opportunity.
Designer Brands is a footwear retailer that owns the Designer Shoe Warehouse brand and sports a market cap of nearly $400m. DBI’s share price has declined substantially since the company announced Q1’24 results in early June, dropping from $9-$10/share to around $7/share now. At first glance, it might seem like the price fall was due to weaker-than-expected earnings. However, the results were actually not that bad and did not justify such a steep decline. In fact, DBI’s management reaffirmed guidance and provided a positive outlook, whereas the share price only saw a slight dip on the day of the earnings release.
Instead, the move appears to have been largely driven by DBI getting removed from the Pacer US Small Cap Cash Cows 100 ETF (CALF), which invests only in top 100 FCF yielding stocks included in S&P 600. Last year, DBI’s FCF dropped substantially (partly due to weak retail environment) and it lost the qualification for the CALF ETF. The ETF was rebalanced in June and sold off a large position in DBI (11m shares). The forced selling has created an attractive opportunity to own DBI at below 10x FY24E EPS of $40m-$46m. This forward EPS might not accurately reflect DBI’s true earnings potential and instead just indicate a trough level, given that the company generated substantially higher adjusted net income over recent years ($131m in FY21, $114m in FY19, and $135m in FY18).
As the market digests the huge inflow of sold shares, DBI is expected to re-rate to pre-forced sale levels. One potential catalyst could be share buybacks, an area where management has a strong track record. In FY23, DBI repurchased over $100m (25% of current market cap) worth of shares at $10/share price. This also includes a $15m tender offer last June. There’s a chance they might seize the current opportunity and aggressively plow cash into further buybacks.
Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.
DBI has appreciated by 12% from the writeup level of $6.82 (July 15).
Its performance since July 9 (when the recent small cap rally started) has been in line with IWM (around 11%)
Hi, @dt, would appreciate very much if quick pitches like this can indicate clearly the write-up or reference price level that “30% upside” or “10x FY24E EPS” is based on.
DBI’s pre-crash peak market cap was about $640 million ($11.1 /share) and current market cap is about $420 million. Average daily volume this year is about 1.7 million shares (recent 20 day average is 1.3 million).
Pacer US Small Cap Cash Cows 100 ETF (CALF) has net assets of about $9,200 million, holds 100 stocks, and its largest position size is 2.44%.
Not sure what the DBI position size was in CALF before index rebalancing. Assuming 1%, selling pressure was about $92 million, or about two weeks of average trading volume.
Index removal from a large ETF and forced selling can indeed have significant impacts for small cap and less liquid stocks like DBI.
What’s the catalyst for re-rating? Significant buybacks? Is DBI doing it?
The question is, can the impact last so long? it’s been nearly three months since early June.