100 subscriber milestone special; The Container Store $TCS

I love free samples!

Thank you to my first 100 subscribers, and a special thanks to Tommy Deepwater who in retweeting my third ever article on Transocean (RIG), got my tweet seen by 15,000 eyeballs. Another special thanks to the ROI Channel who restacked my article on Vertex Energy (VTNR).

I have not yet put any content behind a paywall, my favorite part of capitalism is the free samples of bourbon chicken at the mall.  I have a strong belief that my bourbon chicken is beyond reproach, and I will be generous with my free samples.  

For those of you who are newer, I want to bring your attention to my article that I believe has the most imminent catalyst, Forward Air (FWRD).  Since writing the article, the stock price looks to me like somebody with real capital is building a large position.

I also want to bring your attention to my first article on Medical Properties Trust (MPW), it does have a limited upside, but I have never seen a lower risk investment with the potential to double.

I might need to change my name to Unemployable Small Cap Value Degen, I was reasonably far into the interview process for an equity analyst position, when I rediscovered that for compliance reasons, I would have to give up my limited partnership with four clients.  While not big enough to pay the bills yet, I do believe my limited partnership is where my future lies, so perhaps I will never have a corporate job with benefits again.  You would think I would have remembered that detail from my time before grad school as a financial advisor with Merrill Lynch.  

Since I believe every article, even if I ever put out macro musings, god forbid, should have an actionable investment, allow me to awkwardly segue into The Container Store (TCS).

The Container Store is a custom closet installation business masquerading as an overpriced storage bin retail establishment.  Last quarter, 40% of their revenues were from custom closet installations, and the CEO wants to ramp this number up to 60%.  So the retail space has been discovered by management to be a mediocre breakeven front from which to sell custom closets to posh urbanites who want a custom shrine for their new Birkin Bag.  

This fits with my K-shaped economy prediction, that the high end will thrive, while the middle class falls to low end, and even though low end is struggling, there will be a lot more of them.  I want to avoid middle class businesses and target high end and low end businesses.  But, I have a bias toward the low end businesses, I don’t understand fashion brands, and I find it hard to invest in the luxury space.  For this reason, I love TCS, it is exposure to luxury that I can wrap my head around.

Despite the headwinds after the Covid durable goods pull forward, TCS has been expanding and cash flow breakeven.  That is a shocking accomplishment.  Please let that sink in and take a look at the graphs below.  When everyone moved to the suburbs, bought a house, remodeled the kitchen, built a deck and a privacy fence, etc. during covid, durable goods purchases were pulled forward to an unprecedented degree.  For The Container Store to not only be building out new stores, but to be cash flow breakeven is jaw-droppingly good management.  Just a return to normalcy after the pull forward would be an enormous transition from a headwind to a tailwind, and it looks like that transition is poised to happen any quarter.

Another potential transition from headwind to tailwind would be the housing market unfreezing.  This could happen from falling interest rates, compressing mortgage spreads, baby boomers downsizing, or people just getting accustomed to 7% mortgages.  I believe one of those things will unfreeze the housing market in a relatively short time frame.

I am reluctant to discuss management because even after listening to so many earnings calls, my swindler radar is not working on these guys.  I am not getting a good read, not positive or negative, just a sensor malfunction.  It doesn’t mean they are bad, it just means I don’t have much to offer by way of judgement.

One potential risk is that management has stated that they are very unhappy with the way the market is valuing them, and they are pursuing their options.  This may mean that they are looking for someone to take them private.  This would potentially limit the massive upside potential from this investment.  Based on price to sales, any return to normalcy would be a 10x to 15x, but that would not be realized if someone took them private for a 20% premium to the current stock price.  

That is a risk that I will just have to take.  I have started a small position and I am still building it.   I doubt the price could fall so far from here that the take private would take place at a discount to these prices.  The stock would have to fall, say 30%, and then get taken private at a 20% premium, resulting in a realized loss from the current stock price.  I have been fooled before, but it seems pretty low odds to me given the current valuation; the price to sales ratio is currently 0.04 compared to a pre covid average of 0.5.   That’s a $32 million market cap for a business with $850 million in trailing twelve month revenue, a peak 2022 revenue of $1.1 billion, and cashflow breakeven, with potential imminent tailwinds.