Finally a Buy Recommendation

Since going 100% cash a few months ago, I haven’t made any recommendations. As the opportunity set from hell lingers, my absolute return portfolio continues to be very liquid and positioned for the future. However, today I decided to mix it up a little. No, I don’t have a stock recommendation, but I do have a suit recommendation.

Some people can notice the difference between an expensive and an inexpensive suit. Fortunately I can’t and I don’t care to learn, so it doesn’t bother me wearing what I prefer to call a “value” suit. And even if I could tell the difference, as a portfolio manager, I’ve never been hired because of my suit. No one has ever said to me, “Great process, discipline, returns, but what about that suit? You can’t be serious.” Well, maybe they’ve thought it, but they’ve never said it.

Today I’m placing a buy recommendation on Stein Mart suits. There are several reasons for this. First, the price is hard to beat. You can get a name-brand suit for around $199. It may or may not be a brand you know, but there’s a name on the tag, which is good enough for me. Another nice thing about Stein Mart, is they often sell the pants and jacket separately. This creates a little known suit market inefficiency. What wears out first with a suit? The pants of course. By buying three pants and one jacket, you can essentially own three suits at a meaningful discount to what you’d pay for the complete set. Making this buy recommendation even more attractive, is the pants are usually considerably less expensive than the jacket. Lastly, it’s fun to fool your colleagues into believing you’re wearing the same suit every day, when you’re not (at least not the pants). They may feel sorry for you and buy you lunch. Another bonus!

So there you go. My first recommendation since going 100% cash. Remember, as absolute return investors it’s important we wait for that fat pitch. This is what a fat pitch looks like. Swing away!

While Stein Mart provides considerable value for suit wearers, Stein Mart shareholders weren’t feeling like they got such a great deal today. Stein Mart’s stock declined -16% after they announced their CEO was stepping down. Furthermore, Stein Mart disclosed operating results were lower than expected. In the press release, management said the current operating environment was “challenging” and that comparable sales for the third quarter declined -4%. As a result of lower than expected sales, management also lowered its gross margins to 150 basis points below Q3 2015.

Add Stein Mart to the growing list of consumer companies reporting weakening operating results. How many more data points do we need before we can call it a trend? I think we’re getting close. I also think we’re getting close to fundamentals mattering again. Although the stock market continues to trade as if poor operating results are company-specific, when companies announce poor results their stocks are responding negatively, sometimes noticeably. This is different than most of the current market cycle, when bad news was often ignored. If the “bad news matters” psychology spreads and profits continue to revert, we may actually see some real opportunities soon (outside of cheap suits). Now that would be fitting.

Have a great weekend!