Vultures, Bears, & Natural Gas

The vultures are circling Hanesbrands - HBI - after the company eliminated the dividend. The stock plunged to close Friday at $6.55.

There is actually a lot to like here. The brands are decent. Hanes has 20-30% market share, and the Champion brand can even be found at stores like Macy’s.

HBI was a spin-off of the old Sara Lee in 2006.

“Everybody doesn’t like something, but nobody doesn’t like Sara Lee”

Sorry, that was one of my favorites jingles.

HBI is run a reasonable guy that came from Wal-Mart a few years ago. Maybe he tried too hard to save the dividend, but this is far from a bankruptcy. Debt is high, but not unmanageable.

Operating income in 2023 should be $500 million, and debt service should be $300-350 million after some renegotiation. The company thinks they have could have sales of $8 billion at a 14% operating margin. HBI is different because they actually own 65% of their production facilities. That makes margin comparisons with other apparel makers difficult. HBI also has substantial, maybe 20%, of sales in Australia. An asset that could be sold.

Even if you use $7 billion for sales, and a 12% operating margin, and interest of $350 million, you get close to $1/share in earnings in 2024.

Can I really have confidence that is the worst case? Not really, but it is an idea to think about.

I think there are plenty of “yield whores” who have not yet sold their shares. Let’s wait and see if we can get the stock down to $5/share by next month.

Just for good measure my anti-hero, Jim Cramer got a question on HBI in the “lighting round” last night and he gave a an unequivocal sell, and told the poor guy to buy some crazy cosmetics stock at 47x. Just classic, you can’t make this shit up.

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CNBC did nice rehash of the Bill Ackman vs Carl Icahn battle over Herbalife - HLF, that was 10 years ago this week.

In the long run Ackman was right, but Icahn won in the short-term. HLF’s stock has severely underperformed since the battle.

To me the amazing thing was 20 large institutional investors were able to watch Ackman’s superb presentation and still own HLF stock. Never underestimated the significant number of institutional investors that play the game of trying to squeeze short-sellers.

A large Fidelity fund manager asked my friend what he thought of a small insurance company called Conseco. He warned my friend, “it might be the best long and short of all-time”. He was dead right. Conseco went up 800% and then plunged into bankruptcy. Some folks made money both ways, bet on it.

Why is ARKK up 40% this year? Someone is having fun squeezing the shorts.

More important to us, let’s check in on what Bill Ackman is doing:

Bill has simplified his life. Ackman took my advice to all investors. He analyzed a few restaurant stocks, and so he owns Chipotle and Restaurant Brands (Tim Horton’s, Burger King, Popeye’s). I would prefer First Watch and Noodles, but Bill has too much money to look at small caps.

Ackman’s big holding is Howard Hughes Corp - HHC. At some price this might be an interesting stock. HHC owns large masterplanned residential communities. I love what HHC have done with Summerlin in Las Vegas, but their Houston, Phoenix and New York properties have some issues. HHC deserves more analysis.

HLF should eventually get to zero, but it might take awhile. Battle over.

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I just could no let the plunge in natural gas prices to multi-year lows go without some analysis.

I looked at all the stocks owned by the First Trust Natural Gas ETF - symbol - FCG.

I know the bulls love Pioneer - PXD, and all the others that have the variable dividend plans. The CEO of PXD said he will someday have the highest yielding stock on the NYSE. Sorry, but those variable dividend plans scare me. They have the effect of “levitating” the stocks well above fair value. I do not want to play the game.

I found one stock I like because the new CEO made fun of the variable dividend guys by calling them “a bad fifth sequel to Star Wars”.

Magnolia Oil & Gas - MGY - is a very conservatively run South Texas producer. They are born of a SPAC in 2018, but they are experienced guys from the old Occidental Petroleum that have built an interesting little company. The company is 50/50 oil and gas. Net debt is near zero. They are buying stock back, and will not play the variable dividend game. At some price MGY could be a good stock.

I looked for a pure natural gas play, without the variable dividend mess, and could not find one.