Summer COVID Stocks are Fall-ing… What’s Next?

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A surprise group of winning stocks this summer were “outdoor stocks”—you’ll see I mention CWH Camping, Thor Industries, Winnebago and more below.

While most investors were focused on online stocks (my Big Win was Overstock; $13 – $90 in weeks!), stocks that benefited from people not travelling overseas also did amazingly well.  

That was a little surprising as most of them have no online presence.

But after a big run—many were up 5-10x trough to peak—almost all of them have the same chart, recently dipping under all their moving averages after peaking in August.

These stocks have been “falling” you could say. And that may happen right through year end tax loss selling. 

But will they be a buy in January, in preparation for another massive seasonal run if COVID is still a big issue? They could be the tax loss buys of the year.

 

The Outdoor Stocks—Are They A Buy This Winter?

 

Here’s a few examples:

Let’s start with the RV makers.  Camping World Holdings (CWH – NYSE) was a $4 stock in March. 

Before COVID it was $15. It hit $42 this summer!

Why the big move? Simple – the company is generating heaps of cash. 

Camping World generated about $200 million in free cash flow in all of 2019. Flash forward a year. Free cash flow for the second quarter was $525 million. 

Q3 is typically a seasonally better quarter. The results, which are expected November 2nd, could be truly blow-out numbers.

If Camping World can keep it up (and I think that’s a BIG If), it is not expensive. The company has a market capitalization of only $2.4 billion. 

One person willing to bet on Camping World is CEO, Marcus Lemonis. Lemonis is better known for his role on the CNBC series “The Profit”. But he has been CEO of Camping World since 2006.

Lemonis has made his bets. Between August 10th and September 4th Lemonis bought $3 million of Camping World stock.

Source: Ink Research

Lemonis purchased stock at well above the trading price today. He clearly doesn’t buy into the bear thesis that this is a one-time surge in demand.

The bears argue that as demand abates, inventory will pile up, beginning a cycle of markdowns. 

But that does not appear to be playing out – at least not yet. 

In its fiscal fourth quarter, Winnebago Industries (WGO – NYSE; $17 – $72) reported a record backlog in October. They described “depleted dealer inventory” caused by “high levels of consumer demand”.

Thor Industries (THO-NYSE; $35 – $115 this year) another large manufacturer of recreational vehicles, made a similar comment in late September. 

Thor saw “increasing retail demand over the course of the quarter, driving dealer inventories to historically low levels by year end and our year-end backlog to”.

 

Sporting Goods Stores

RV sales are not the only outdoor product category producing eye-popping second quarter numbers. 

All the big-box sports retailers delivered eye-popping numbers in Q2.

Top of that list is a recent IPO, Academy Sports and Outdoors (ASO – NASDAQ).

ASO owns 259 sporting good stores, mostly in the southern United States. ASO went public on August 2nd. They were previously owned by the private equity firm KKR.  

The IPO was not well received by investors. An expected range of $15 to $17 had to be reduced to $13. 

The lack of enthusiasm could not be attributed to ASO’s recent results, which were quite impressive.

According the company’s S-1 filing, adjusted free cash flow for the first half of this year was $775 million. 

This is against a market capitalization of roughly $1.3 billion.

That is a big pile of cash and a significant improvement over the past. In 2019, which was ASO’s best year of the 3 years disclosed in their filings, free cash was $200 million.

The growth is coming from a combination of e-commerce and in-store purchases. E-comm grew from $115 million in the first half of 2019 to $300 million in 2020. 

But bricks and mortar business grew as well, up 11% on a much larger $2.2 billion base.

One of the largest names in the sporting goods sector, Dicks Sporting Goods (DKS – NYSE) saw strong cash flow in Q2.

Dicks is a bigger company, with a market capitalization of $5.3 billion. They operate 726 sporting goods stores across the United States.

Like many bricks and mortar stores, Dicks shut all their doors in March. They did not begin to reopen them until late April. 

By the end of June all the stores were back open.

The shutdown of stores did not seem to hurt their results. Dicks second quarter free cash flow was over $1 billion. 

This single quarter free cash flow is more than the annual cash flow that Dicks has generated in any prior year.

While the quarterly number was buoyed by working capital changes, even before changes to working capital, free cash was still $280 million.

Source: Dicks Sporting Goods SEC Filings

Dicks saw a big jump in online sales–194% year-over-year, representing 30% of total sales in the second quarter.

These tremendous online sales from companies like Dick’s and ASO may prove sticky. That could change the way these retailers do business. 

In a recent note Morgan Stanley said that due to “higher eCommerce penetration post-COVID” they expected “retailers to rationalize their store footprints to a degree to focus on their most productive locations.”

Morgan Stanley analyzed their universe of retailers, including Dick’s. 

They determined that 10% of stores could be shutdown while maintaining the same customer coverage assuming a 5-mile wider radius.

Source: Morgan Stanley

By now we are all accustom to ordering online and curb-side pick-up. An extra couple miles seems unlikely to deter us.

The unintentional trend of doing more with less is evident in the results of another sports retailer, Big 5 Sporting Goods (BGFV – NASDAQ). 

Big 5 operates over half of their 431 stores out of California. When COVID hit in mid-March, these stores all shut down.

Big 5 has little online presence. They generated negligible online sales before the pandemic as well as after.

Yet while the closures dented their top-line results – Q2 revenue fell from $241 million to $229 million yoy – their bottom-line did better than ever.

Big 5 generated $63 million of free cash flow, $32 million excluding working capital adjustments. 

Things appear to have improved even more in July. 

Big 5 announced that they had ended July with $38 million of cash and had repaid their credit facility. 

That implies that Big 5 generated another $57 million of cash in July alone! This for a company with a $175 million market cap.

Big 5 has been a laggard in the past. The stock has floundered in the single digits. The company has never consistently generated free cash from their operations.

One has to wonder whether Big 5 management is asking how they blew the doors off in Q2 with less stores open? The conclusion may be, why did they have so many stores in the first place?

 

What Happens Next

 

 There are two trends at work here. One is that COVID cases are again trending badly…so does the shift to the outdoors continue into the winter? 

The stocks “falling” below their moving averages suggest not. 

But even with a vaccine next year, does international travel pick up much?

Q3 numbers are likely to be strong…but will that mark the top (fundamentally; as in cash flow) and these stocks continue to discount a much quieter winter?

Investors are for now rightly cautious. When Thor Industries reported in September, they saw EPS increased from $1.67 to $2.14 yoy. Backlog increased 186% yoy. 

Thor guided to 20% growth for calendar 2021. Yet the stock has fallen from $94 to $85 (from a high of $120 in August).

Investors are obviously looking ahead to the world after COVID. While that may still seem like a long way off, in “company-years” it is only a few more quarters.

 

Lower Rents and Higher Online Sales May Be Coming?

 

But there is reason to think the future will remain bright. These bricks & mortar retailers exit the pandemic with some tricks up their sleeves.

First, they have more leverage on landlords. Lower rent translates into higher margins. 

Second, online is here to stay and these retailers have learned that they can sell their product even as less stores are open. 

Bank of America expects 8% of stores to close by 2025.

Source: Bank of America

Poor performing locations will be fast to shut down. For the last 9 years online sales have been a margin headwind. That is going to change.

Third, these companies will leverage their new customer base. Take Camping World for example. 

Camping World reports 5.2 million active customers including 2.1 million Good Sam members (think of Good Sam as a brand club membership).

This is a large base of customers with an interest in the outdoors. To capture more value from these customers, Camping World plans to provide collision repair services, a servicing and repair subscription service, and a peer-to-peer RV marketplace including RV rentals.

What makes this kind of expansion more doable now than a year ago is the windfall of cash. Rather than just trying to stay alive, a company is like Camping World now has the war chest to fight back. 

Finally, contrary to the frequent pronouncements that COVID is over, the reality is that we are still hip deep in it. 

COVID is looking more like a seasonal disease and we are just entering the high season. The cash may keep coming for longer than guessed.

These companies will not be able to continue their cash-printing ways for ever. But neither are they likely to go back to pre-COVID levels. 

The answer of where they deserve to be valued likely lies somewhere in the middle, and in large part will depend on what they have learned from COVID and how they deploy their cash.

The Market is a forward discounting mechanism by 5 – 9 months. 

That means January trading in these outdoor stocks should give investors a sense of what to expect.

I’ll be watching to see how much these stocks keep “falling” through year end tax loss selling , and I’ll update you in late January.

 

Keith