Montaka CIO Andrew Macken and co-PM Chris Demasi were the only duo on stage at the Sohn Hearts & Minds conference 2019. They shared two stock ideas which were both well received, gauging by the encouraging audience feedback.
Read snippets about the Montaka stock thesis shared at the Sohn Conference as covered by Robert Guy in the Australian Financial Review (AFR) below:
(Link to complete article here)
Sohn stock pick: Montaka's Andrew Macken and Chris Demasi - SHORT Sports Direct (SPD LON)
The Montaka duo is short embattled UK retailer Sports Direct, founded by billionaire Mark Ashley. It is the largest retailer of sports equipment and apparel.
“It’s in dire straits” says Macken. “Online competition has damaged his business, sales have been declining for years already. In fact sales have fallen so low he’s lost bargaining power with suppliers,” says Demasi.
The big brands are holding back product and costs are going up, prices are going up and stock is out of date and fashion. Sports Direct’s balance sheets is also strained.
“Debt has been building significantly which increases chances of financial stress,” says Macken. This could lead to further price discounting.
The Belgium tax authorities are also chasing €674 million in back taxes, about a third of market cap. The acquisition of House of Fraser “created the allusion of growth” says Macken.
Sohn stock pick: Montaka's Andrew Macken and Chris Demasi - Floor & Decor (FND NYSE)
Montaka Global Investment’s Andrew Macken and Chris Demasi think US-based Floor and Decor can double in price, while the outlook is grim for UK-based Sports Direct.
US-based Floor and Decor is a seller of flooring with a market capitalisation of $US4 billion. It has sales of $US2 billion a year across 130 big box stores. The chief executive is Tom Taylor who earned his stripes at Home Depot, which he joined in the 1980s and eventually ended up running all their stores.
“It’s not what they sell but how they sell,” says Macken. The strategy is based around every day low prices and the stores offer a big range of products. Same store sales have grown at 15 per cent per annum over the last decade.
Great scale means they can go to suppliers and get lower costs. They use lower costs to further drop prices and invest in customer experience. Montaka downplays the threat from competitors. “They can’t nearly allocate as much space,” said Demasi.
Demasi says “flooring is notoriously difficult for online because the instore experience is critical for the customer. And the products are too heavy and costly to deliver door to door”.
The threat from higher tariffs is being offset as they company seeks to source less than 20 per cent of product from overseas. Montaka sees the US economy and housing market as strong. They also believe the company’s earnings power is hidden.
“Stores start out negative, they actually lose money in the early years but the profit margin become highly positive in the later years,” says Macken. More than half Floor and Decor’s stores are less than three years old today.
The company is targeting 400 stores in a decade but Montaka believes they can make that target early. Montaka says the stock is worth twice as much than its current $US43 a share.
