Saturday, February 26, 2011

Update of Portfolio: True Religion (TRLG)

Over the next few posts, I will be reviewing the various stocks that I have in my holdings, since they all have reported on their 2010 Q4 results.  For now, you can check what my trading activity has been.  Clicking on "Felix's Trading History" at the top right will bring you there as well.

I will be starting with True Religion (Ticker: TRLG), the highlight of the week.  If you have been following this blog for the past year, you would know that I have been accumulating this stock.  I started buying the stock in April of last year, at $29.  I started with a small amount and planned to "scale" into the stock (as Jim Cramer would call it).  In essence, if I wanted to buy $10000 worth of a certain stock, I would buy, say $2000 worth each time.  If the stock dips, I would buy more.  If instead the stock rises, then good for me, I've made some money, but I wouldn't not buy until it dips.  The stock got punished, in my opinion, unfairly, over the course of the last 10 months and bottomed at $17.50.  I continued to buy as it went down.  The stock started out making up about 3% of my portfolio to being more than 20% now.  I even started to sell naked put options because I was getting bullish about the stock and wanted to make good use of my margin account.

Yesterday, I was rewarded.  True Religion reported Q4 earnings that beat estimates and the stock rose by 19% in a single day, to $25.07.  My average cost was $22.55.  A few lessons learned (even though there surely will be more lessons ahead): i) if you are fairly certain of your analysis and prognosis, then trust it, even when the market says otherwise, ii) accumulating a stock is a sure way not to miss a big jump in a stock, iii) the market is sometimes not very logical.

Let me elaborate on lesson #iii.  First, the Q4 press release was not stellar.  The results were good, but guidance was a little soft.  In 2009, True Religion made $1.92/share.  In 2010, that number dropped to $1.86/share.  They forecast $1.80/share for 2011.  The trend is definitely not something an investor would like to see.  But the stock got bid up 19% anyway.  Of course, earnings is not the whole story, and for True Religion, it isn't, but usually, the market should have reacted opposite to how it did.  So, this reaction has not been expected.

But was the reaction a correct one?  Was the 19% jump justified?  Absolutely!  The stock had been hammered for a long time and it was much undervalued.  Remember how I got in at $29?  I thought $29 was undervalued; imagine what I felt at $17.50!!  I believe a lot of the investors saw the revenue growth, which was by leaps and bounds ($311 million in 2009, to $364 million in 2010, to projected $405 million in 2011), and same store sales growth of more than 7%.  The expansion plans look good with 23 new stores opening in 2011, most in the US and a handful in international cities.

The only "bad" number in the report was that SG&A was up, which hurt earnings and will continue to hurt earnings in the coming year.  This is the cost incurred by setting up stores and offices in international locations.  These are growing pains, which are necessary to ensure sustained growth.  I like how management is "biting the bullet" and would rather take an earnings hit now, than to sacrifice growth potential in international markets.

I've embedded a Rule #1 analysis spreadsheet for True Religion below.  The sheet does not reflect Q4 numbers, but is close enough to give a somewhat accurate sticker price.  I've assumed a P/E ratio of 20 in calculating the sticker price.  The stock is still undervalued!


Figure 1: Rule #1 Analysis of True Religion (TRLG)

Since True Religion already makes up a good chunk of my portfolio, I do not plan on adding to my position.  I will be in a holding pattern for the stock in the coming months, and potentially be selling more put options.  I particularly like selling options for True Religion because the options are priced fairly highly compared to the stock price, which is due partly to the high volatility of the stock.  For a Rule #1/value investor, volatility is actually a friend.  One would buy at dips and sell at peaks.  For me, I would also sell put options at dips.

In short, the company is in good shape.  It's selling products at high margins, has a good expansion plan, and its stores are far from saturation in the US, and especially in international markets.  Best of all, the stock is priced nicely, where you can still get some margin of safety.