David Einhorn was once considered one of the best stock pickers on Wall Street, and his fund, Greenlight Capital, was the cream of the crop in the hedge fund world.
But, times have changed. Einhorn’s value investing style was been challenged by the recent bull market, and the ability of top-notch stocks like Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) to keep heading higher despite big valuations. Over the past three years, Einhorn’s fund hasn’t done well. And things aren’t getting better. Year-to-date, Greenlight Capital is down 18%.
By comparison, the S&P 500 is up 6% year-to-date.
Now, Einhorn and company are apparently looking in the retail sector for winners to help boost the fund’s performance. Specifically, according to recent filings, Greenlight Capital bought three retail stocks this past quarter.
Which three retail stocks are they? And should you buy them too? Here’s a deeper look.
Retail Stocks Greenlight Capital Bought Last Quarter: Gap (GPS)
One of the retail stocks that Einhorn’s Greenlight Capital picked up in the second quarter of 2018 was clothing retailer Gap (NYSE:GPS).
This looks like a good pick up for Einhorn. The past five years have been messy for Gap thanks to e-commerce encroachment. Sales have been essentially flat during that stretch, weighed down by mostly negative to flat comparable sales growth. Meanwhile, margins have compressed thanks to pricing pressures, and the company’s earnings have fallen by a ton. As a result, GPS stock is 30% off its five year highs.
But, things seem to be turning a corner at Gap.
In 2017, comparable sales increased 3%, the best mark in several years. Meanwhile, both gross margins and operating margins dramatically improved, and profits actually rose year-over-year for the first time since 2014. Operational improvements in 2017 caused GPS stock to jump last year. Over the past year, GPS stock is up nearly 50%.
Year-to-date, though, GPS is down 5% because Q1 2018 numbers didn’t live up to the 2017 precedent. Comparable sales rose just 1%, and margins actually fell back. Management said, though, that the weakness was due to clearing inventory, and that Q2 was off to a much better start. As such, it looks the rebound in Gap simply hit a hiccup in Q1, and is now back on track.
If this rebound does persist, and Gap grows revenues at a low single digit rate alongside healthy margin expansion for the foreseeable future, then GPS stock could head higher from here (it trades at just 12X forward earnings).
Retail Stocks Greenlight Capital Bought Last Quarter: TJX Companies (TJX)
The second retail stock that Greenlight Capital bought last quarter was TJX Companies (NYSE:TJX), a company whose narrative couldn’t be more different than Gap’s narrative. TJX owns two of the most ubiquitous discount-retail stores, TJ Maxx and Marshalls, as well as several others, including HomeGoods.
Whereas Gap has struggled over the past several years, TJX has thrived because the company’s off-price business model has provided protection from e-commerce encroachment. Over the past several years, comparable sales growth has been consistently positive. Sales have risen by roughly 7% per year. Margin compression has been largely subdued. And, importantly, profit growth has been healthy.
Strong financials have powered healthy gains for TJX stock. Over the past five years, the stock is up more than 90%.
This run can and should continue over the next five years. TJX’s off-price business model continues to do well, regardless of competitive threats in the retail world. All signs point to the e-commerce growth narrative only gaining momentum. Yet, TJX reported comparable sales growth of 3% in the Q1 of 2018, better than the 1% growth reported in the year ago quarter. Meanwhile, net sales jumped 12% higher and margins were largely stable.
Thus, over the next several years, we should get more of the same from TJX that we have seen over the past several years. Considering the valuation is in-line with historical standards (20X forward earnings), then such a performance should result in healthy share price appreciation.
Retail Stocks Greenlight Capital Bought Last Quarter: Dollar Tree (DLTR)
The third retail stock that Greenlight Capital bought last quarter was discount retailer Dollar Tree (NYSE:DLTR).
In many aspects, Dollar Tree is like TJX. Both companies have utilized an off-price business model as protection against e-commerce encroachment, and posted robust growth numbers over the past several years. Over at Dollar Tree, comparable sales growth has consistently been positive for the past several years. So has revenue growth. Gross margins have made a comeback over the past few years. Profit growth has been healthy.
DLTR stock, though, hasn’t been that big of a winner. DLTR stock is up 75% over the past 5 years, better than the S&P 500’s 70% return. But, year-to-date, DLTR stock is down 12%, versus a 6% gain for the S&P 500.
Clearly, Einhorn believes recent weakness is overstated. But, recent weakness is due to a reversal in the growth narrative. Comparable sales growth is slowing. So is top-line growth. Margins appear to be under pressure again.
At the core of all these problems is Walmart (NYSE:WMT). Walmart and dollar stores have a long history of competing with one another. Recently, Walmart has been getting the upper-hand due to tech advancements and digital capabilities. This will likely continue so long as dollar stores fail to innovate.
Thus, I’m not sure that DLTR stock has much upside left from here. Recent weakness is warranted given deteriorating fundamentals. More upside? Hardly guaranteed. So long as Walmart remains hot, Dollar Tree could struggle.
As of this writing, Luke Lango was long AMZN, TJX, and WMT.
