The Berkshire Hathaway of Jewelry

Bear market withstanding, this stock could double in 3 to 5 years

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Dec 15, 2016
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The Holiday season means jewelry is given as a gift to many people around the world. Signet Jewelers (SIG, Financial) is the the world’s largest retailer of specialty jewelry with brands like Kay, Zales, Jared, Pagoda and others. They operate more than 3,500 stores in the U.S., U.K. and Canada.

The brands you know

Kay Jewelers has 1,129 stores across 50 states and accounts for roughly 40% of the company’s sales. You have seen the commercials and know the brand where “Every Kiss begins with Kay.” It is a great brand.

Zales has 730 stores, typically in the same shopping mall as you would find a Kay Jewelers, giving the illusion of choice. Zales accounts for north of 20% of the company’s total revenue.

Jared Galleria of Jewelry has 270 stores, usually occupying three to four times the retail space of Kay and Zales. It accounts for approximately 20% of Signet’s total revenue. The company is famous for their slogan “He went to Jared” in regard to engagement rings.

The company has a number of other store brands, but the big three make up 80% of Signet’s financial performance. While some investors may not look at the chain as having a moat around it, remember that being the low-cost producer with well-known brands is a key ingredient in that.

The good, the bad and the gurus

In the last 10 years, the company has kept growing, docking $3 billion more in sales this year than in 2007 (an 85% rise) and earning 115% more per share due to a solid commitment to share buybacks as well as margin expansion. Perhaps the best financial measure comes down to spending. Signet does not need to spend much to create 16% annual return on equity. All good things for investors.

The retailer reported worse-than-expected second-quarter results with sales coming in at $1.37 billion, which was almost $100 million below analyst estimates and down 3% year over year. In the call, management cited challenging market conditions across most stores and merchandise categories, especially in the energy-dependent regions. These conditions could persist into the New Year, even with oil and gas per barrel climbing. The company reduced its guidance to the $7.50 range, which is still 15% higher than 2016.

Guru ownership is rather light in the stock with Steven Cohen (Trades, Portfolio) owning both 42,100 shares and a call for 100,000 more. Sarah Ketterer (Trades, Portfolio)’s Causeway Capital owns slightly more than 2% of the shares (1.4 million).

In closing

Maybe I am grasping at straws here because when I look around the overall market, I do not get a sense there is much value. But instead of just buying into the Vanguard (VOO, Financial) or SPDR (SPY, Financial), I am trying to find stocks that will do better than those long term.

I think Signet is one of them. It is down 27% on the year, yet better off financially than in 2015. The company’s debt levels are manageable at just 3 times net income. While there is a 16% short interest in the stock, I do not believe that people will cease to shop “in-store” altogether. And when consumers do get to that point, each of Signet’s big three have great online presences to pick up the slack. The shorts may push the stock higher in 2017 faster than expected.

If you are unsure about buying in just yet, you can write put options on the stock. With an Inauguration Day expiration (Jan. 20) at a $95 strike price, the stock would gross ~4.5%. At a $90 strike, you would still bank 2.9%, better than the 1% dividend for owning the common.

Disclosure: I do not own stock in any of the companies mentioned in this article.

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