Back to the Rock Pile - WNC - FL

Let’s try to get through the 30 small cap stocks listed at the bottom of the prior post.

There is a reason investors tend to get more “top-down” oriented as they get older. Looking through a group of small caps is hard work. It is time to get out the sledge hammer and start pounding on the rock pile of ideas.

Wabash National - WNC - $11 - mkt. cap. = $470 million - is an interesting company. I do too much long distance driving, so I have time to evaluate truck trailers. As you drive up on a solid looking trailer, you will often see the little red Wabash logo. Many other railers look like they might collapse at any moment. WNC makes semi-trailers and underbodies, as well as tankers and refrigerated trailers.

WNC will make about $1/share in 2025, down from almost $5/share in 2023. Unit sales declined about 30% in 2024, and are expected about flat in 2025. Normally I might say, “ok earnings power is about $2/share and the stocks is only $11, let’s buy”. The balance sheet is solid, debt is only 1.7x depressed EBITDA, and they have been buying stock back. Good value investors Victory Capital and Charlie Royce own 2% each. What is the problem?

Yikes! In late 2023 WNC lost a nearly a $500 million verdict is a product liability suit, and accounting rules somehow made them book a liability for the entire amount. The plaintiff was drunk, not wearing a seatbelt, and hit a parked WNC trailer that complied with all Federal safety rules. There seems to be a 95% chance WNC will win on appeal, but I have become too much of a “chick shit” in my old age. Let’s monitor the WNC disclosure, but move on to simpler ideas.

Before leaving truck trailers I am required by law to think about the other truck builders. Freightliner is German, Mack is owned by Volvo, and Peterbuilt/Kenworth is Paccar - PCAR - $97. PCAR is very well run, but seldom is cheap enough. Cummins - CMI - $315 (truck engines), is also near a high, pass. No other trailer maker is public.

Next up is perennial value stock Foot Locker - FL - $14 - mkt. cap. = $1.3 billion. I fear the end is near. I predict $%#%%$#@ Capital will buy FL for $18/share this year, and put FL out of its misery as a public company. If I were a merger arb trader I might try to play the spread.

To me its seems FL management did the minimum required by law to present its 2025/6 forecast. When your stock is 50% of book, 4x previous peak earnings, and just 17% of sales, you should at least address capital allocation in your presentation. You might at least make an effort to sound angry or indignant. Hotshot CEO Mary Dillon (from Ulta Beauty and McDonalds) came in to FL in 2021 with the stock at $60/share and has overseen a collapse.

Folks fleeing the malls and issues at Nike have made this a tough business. FL has cut the bottom 20% of stores, and the balance sheet is pristine. FL claims tariffs might only effect 10% of the business. Digital is over 20% of sales, and a new loyalty program is working. Maybe 30% of remaining stores will be remodeled by year end 2025.

If my “read” about a FL sale is incorrect, this could be a very cheap stock. The shift toward digital is flattening quickly. Can margins ever recover? Young folks buying sneakers almost as a collectible seems to be a dying concept. Retail is very, very, very difficult. I have stayed away for a long time. Nothing I heard on the March FL call made me want to come back.

I was very correct when I called out Interpublic’s - IPG - $26 “lack of enthusiasm” call this spring, and they sold out a few months later. I want to find good companies that can double over the next 5 years, not arb the last 25% out of a private equity buyout.

I am not a Nike fan, and the other shoe company stocks are expensive. There are lots of cheap specialty retailers. American Eagle - AEO - $12 is on my radar.