Bruce Kaser is running a service that’s heir to The Turnaround Letter, which was one of the fairly early investment newsletters (launched by George Putnam in the 1980s) and is now published by Cabot, so during the pandemic it became the Cabot Turnaround Letter (currently being offered at $497 for the first year). I don’t think I’ve ever written about this service before, but he’s out with a new teaser pitch for a turnaround stock… and, well, it caught my eye. He says his picks over the past three years have beaten the market 76% to 46% (that’s as of July — though the market today is right about where it was in July, despite the ups and downs in recent months, so perhaps his performance is still similarly good).

Kaser also includes a little graphic in his pitch that highlights some upcoming catalysts, an example of his Catalyst Watch feature, though not all of them are investments he has recommended or even ideas that he thinks might be appealing — the ones he “starred” as of the end of July as being “worth watching” were Paypal (PYPL) and Pinterest (PINS) because of the Elliott Management (large activist investor) stake in each, Jefferies (JEF) because of their restructuring, Vera Bradley (VRA), Weber (WEBR), Volkswagen (VWAGY), Red Robin (RRGB), Gap (GPS), Prudential UK (PUK) and Adagio (name since changed to Invivyd (IVVD)) because of new CEOs, and 3M (MMM) because of a pending spinoff. Perhaps one of them rose to the level of being his latest recommendation that’s being teased now? Perhaps it’s something else? Let’s see.

The Special Report he’s dangling as bait is called “My #1 Retail Turnaround Target” … but the headline pitch is the “rebirth of value investing,” which is a pretty popular refrain right now… even though most of the “value investing” newsletters didn’t exactly survive the last decade or so of wild underperformance for “value” (many either went out of business or shrunk into irrelevance because they couldn’t attract investors… or they got more flexible and started recommending growth stocks at 50X earnings).

“Value Investing is back in vogue.

“I know because I saw it reported in Bloomberg a few weeks back. They said… ‘value investing has come back with a vengeance.’

“But the truth is, it never was dead.

“As Charlie Munger, the billionaire investor – and partner of Warren Buffett – recently said earlier this year… not only is value investing NOT dead… it will ‘never die.’

“And, I agree. After all, value investing is what’s behind my own personal wealth.

“At its core, Value Investing is really just buying stocks at a discount.

“And, thanks to a special set of ‘buy now’ triggers…

“I’VE BEEN KNOWN TO BUY STOCKS AT 50 – 60 CENTS ON THE DOLLAR”

He seems to be referring to “We’re All Bargain Hunters Now”, an article that appeared in Bloomberg back in June, but that’s been a big picture story for most of the yar — just last week CNBC ran a story about how value investors have finally had a big period of outperformance… though David Einhorn, who was a value investing rock star a decade ago, has in some ways given up on there being enough people who care about individual stock valuations for his brand of “value investing” to ever recover.

Kaser gives some examples of “value” stocks he says he has bought in the past, including Delta Airlines in 2011 and Teradyne in 2008, in each case roughly doubling his money every year for a 2-3 year period before he sold. So he’s not a “buy and hold” guy, and he has some criteria for buying cheap and selling when stocks get more popular. He says those are in line with his general strategy, which is to aim for 50%+ returns in 2-3 years.

That’s fairly typical of value investors, in my experience — they buy something that is depressed and unloved because they see the seeds of something better growing or some hidden asset that other investors don’t understand, they wait for other people to see the green shoots, and then sell when it’s no longer unloved. It used to be that the ideal value investment was something that traded for 8X earnings because people thought it was broken, but they fixed the problems and started to get some attention for it and maybe the naysayers were just overreacting a bit, and after you bought at 8X earnings the profits grew by 20% over a couple years, and that led other investors to feel better about the potential and bid it up to a valuation of 12X earnings… and then you sell (giving that early value investor a gain of about 80%, if you don’t want to do the math).

And now, says Kaser, we’ve got some exciting opportunities in front of us to get those kinds of gains again…

“2022 is probably going to go down in history as one of the best times for sharp value investors.

“That’s because…

“THERE ARE SO MANY GREAT STOCKS ON SALE!

“As Baron Rothschild said, ‘the time to buy is when there’s blood in the streets.’

“And, boy, is there blood in the streets!”

He generally thinks that the markets will bounce back… but, more importantly, that some stocks will do a lot better than others.

I guess if I were a little more crass I’d insert a “duh” there — but we’ll be open-minded. How does Kaser say we’ll find the next great value turnarounds?

“Step 1: Look for Stocks Other Investors Won’t Touch

“There are a bunch of reasons stocks fall out-of-favor. Maybe the company’s revenues are flat or declining. Maybe their margins are shrinking. Or maybe they’ve tried to acquire other companies – and failed.

“Step 2: Look for 1 of 7 ‘Turnaround Triggers’

“These companies are out-of-favor for good reason. And for them to turn around, something has to change.”

He even lists what his “7 triggers” are, so perhaps we’ll learn something…

1. A fresh start (emerging from bankruptcy).
2. Legal problems that are about to disappear.
3. The beginning of a new cycle that historically points to rapid growth.
4. A credible shareholder that’s putting pressure on management.
5. An unsuccessful IPO.
6. A spinoff that’s about to take place.
7. A new CEO (or other senior leader).

And he says that, “Out of those, #6 and #7 are my favorite. They’re the most reliable indicators of future profitable stocks.” And of those, that his favorite “turnaround trigger” is a new company leader, since that can quickly impact growth.

So what’s the “turnaround story” that he’s excited about today? Here’s how he hints at it:

“Here’s The Next Turnaround Story I’m Excited About

“You may be surprised to learn that it’s a retail company.

“A lot of investors think that Amazon killed brick and mortar retail. Or that the pandemic put the nail in the coffin.

“But that couldn’t be further from the truth.

“Spending is up across the board – both ecommerce and traditional brick and mortar…”

Which retailer? Some clues begin to leak out of the ad….

“… which retailer do I have my eye on?

“Well, it’s NOT the ones making headline news.

“Remember, we’re Value Investors. And we’re looking for companies to buy at a discount.”

“The company I’m eyeing exploded out of the gate in 2016 – nearly tripling its stock price in the first year.

“But, thanks to some missteps from the last CEO, the stock price has languished ever since.

“It’s clearly an out-of-favor stock.

“But my research shows that’s about to change. And fast.

“hey’ve recently hired a great new CEO – one with more than 30 years’ experience in the industry.

“They’ve also placed an investment banker on the board – a sign that they’re serious about doing whatever it takes to turn this ship around.”

Well, we at least know that’s not one of the stocks he had on his “catalyst” watchlist back in July… the only two retailers there are Vera Bradley and GAP, and neither one of them is anywhere near young enough to say it “tripled in its first year” back in 2016.

The answer? No certainty this time, I’m afraid, but Duluth Holdings (DLTH), owner of Duluth Trading, is the only one the Thinkolator can come up with that matches our clues here — they did appoint a new CEO fairly recently, with Sam Sato replacing longtime Chair Stephen Schlecht (who is also (sort of) the founder, majority shareholder, and still Chair of the Board), Sato does have 30+ years of retail experience, the stock did languish after a big IPO year… and they do have an investment banker on the board, though that’s certainly not unusual in small cap world (Brett Paschke, from William Blair, was appointed to the Board in 2021).

You’ve probably seen the ads for Duluth Trading, they’re pretty distinctive, but here’s how they describe themselves:

“Duluth Trading is a Growing Lifestyle Brand for the Modern, Self-Reliant American.

“Based in Mt. Horeb, Wisconsin, we offer high quality, solution-based casual wear, workwear and accessories for men and women who lead a hands-on lifestyle and who value a job well-done. We provide our customers an engaging and entertaining experience. Our marketing incorporates humor and storytelling that convey the uniqueness of our products in a distinctive, fun way, and are available through our content-rich website, catalogs, and ‘store like no other’ retail locations. We are committed to outstanding customer service backed by our ‘No Bull Guarantee.'”

We can’t put this down as a certain match, but I thought I’d share this guesstimate anyway… here’s how it hits on Kaser’s clues:

The shares actually started trading right near the end of 2015, but from that November IPO that started changing hands at around $13.65 (they actual IPO offering price was $12), they did “almost triple” in 2016, hitting a high of almost $38 late that year — which would be a trough to peak gain of about 175%.

And they have surely languished since then — the stock is down about 80% since that peak, mostly because it was a hot story fora while, as they opened new stores and did pretty well on e-commerce sales, and they traded up to a PE ratio in the 40s… and there isn’t much room for disappointment if you’re at that kind of valuation. They missed a couple quarters, and also saw their CEO (Stephanie Pugliese) jump ship to go to Under Armour back in 2019, and investors decided it wasn’t so much a growth story anymore. The (sort of) founder came back and served as CEO for a bit, and then they hired the new guy, Sam Sato, in 2021. Sato has been CEO of Finish Line, another specialty retailer, for many years, and before that he worked his way up the ranks at Nordstrom for decades…. so he is certainly an accomplished retail executive.

Will he be able to turn things around at Duluth? I don’t know. It’s an intriguing story, in part because DLTH is so very small (market cap around $280 million now), has been consistently profitable, and has a real brand identity and vertical integration that lets them keep gross margins pretty high.

The challenge seems to be that they hit real inventory problems coming out of the pandemic, both because of supply chain issues and because (understandably) they didn’t really know what to order in 2020, with revenue going up and down as they had big clearance sales. They’ve tried to reorganize their brands a bit, I can’t pretend to understand why (some are outdoor recreation focused, those are now named AKHG… some are workwear-focused and carry the Duluth brand), and they’ve invested some in technology and increasing efficiency in their distribution and their warehouse operations, which makes sense as a pain point for a relatively small chain that has to upgrade its infrastructure (they about 65 stores now, with direct e-commerce sales also a large part of the business).

What’s to like? They’re making technology investments, trying to raise their profile and sales with women, and continuing to slowly grow their store base… the company is really a year or so into a strategic refocusing, if not really a full “turnaround” … and they have a decent balance sheet, with only a little net debt ($27 million, with an untapped credit line available of another $200 million) and a decent cash balance of $15 million or so. And the stock is relatively inexpensive, it’s currently valued at about 14X the expected earnings for the current year (and 13X the estimated earnings for next year… though there are only two or three analysts making those estimates).

What’s not to like? Revenue and profits are currently trending in the wrong direction, so 2022 (which is mostly their FY 2023, their fiscal year ends in late January) is going to be the first year that their revenue drops from the previous year (by only a couple percent, if that helps). They’ve had periods of declining per-share earnings in the past, in both 2019 and 2020, but 2022 is likely to be the worst drop in earnings yet (from about 90 cents per share last year to 57 cents this year).

And while DLTH is an interesting retailer with a brand identity, good marketing, and a solid niche… we don’t really know if they can grow that in a meaningful way from the current base. And for that type of company, which generally has a pretty limited number of products that drive most of their customer interactions, a couple product missteps of big product launches that flop can really hurt in any given quarter. Especially the holiday quarter, since, like most retailers, DLTH makes about twice as many sales in the Christmas season as it does in the other quarters, and, since that’s also therefore the most efficient quarter, that’s when they typically make 70-90% of their profit. Which means a lot is riding on their brand revamp and their store traffic over the next six or seven weeks, with well over $150 million tied up in inventory right now, and I have no idea how it will work out.

Here’s how the chart looks for DLTH going back to the IPO, for some context — revenue (orange) has pretty consistently grown, earnings have been unpredictable and pretty moribund (purple), and it seems to me that the share price (blue) started out being excited about that revenue growth… but over the past couple years has mostly reacted to the earnings disappointment:

Interesting idea though, and that growing revenue is a nice engine for the company if they can get their margins and inventory challenges under control. This might be one where some personal insight could be helpful for investors, since these regional and blue-collar retail stores can tend to fly under the radar and get discounted by the 30-year-old urbanites who do most of the stock research. That led to great things eventually for some other companies I’ve looked at who have a somewhat similar demographic mismatch between customers and Wall Street folks, like Tractor Supply (TSCO) and The Buckle (BKE). No guarantees, for sure, I’ve never been to Duluth Trading and don’t know if they’re going to make it as a growing specialty retailer… but sometimes companies do cross over into mass market appeal, and going from 50 stores to a few hundred stores can be an extraordinarily lucrative ride for investors.

That’s not the pitch here, of course, I got ahead of myself — I would guess that if this is indeed the Turnaround Letter stock, he’s betting that their investments in targeted marketing and inventory/fulfillment improvements, along with a pickup in store traffic in the coming year (or hopefully in this holiday season) will let them get back to earnings growth… and who knows, if investors begin to believe in the story again, like they did shortly after the IPO, perhaps it will get back to trading at a premium valuation in the next couple years. DLTH is, at the very least, as cheap as it has ever been — if you ignore that period of panic from February to June of 2020, when their business froze for a while.

If you’d like to get a handle on where Duluth is right now, and how management is thinking about the future, I’d suggest reading through their last earnings call transcript — that’s a couple months old now, but it might give some sense of what to expect when they offer their really critical fourth quarter forecast in early December.

If you’ve had any experiences with Duluth Trading as a customer, or other insight to share… or if you’ve got a better match for this Cabot Turnaround Letter pitch, well, we’re all ears… just use the happy little comment box below to share your thoughts. Thanks for reading!