Francesca’s Holdings Corp (NASDAQ:FRAN) has 30% of its stock short and is disliked by the market. Personally, I believe that Francesca’s is a great company with a strong business model.
In fashion, staying fresh is key. Additionally, operating costs must be kept low. Indeed, many companies are hemorrhaging cash just keeping staff in stores even on minimum wage, but not Francesca’s Holdings Corp (NASDAQ:FRAN). The company’s key business goals are:
1). Small stores of less than 1,500 square feet.
2). Lots of stock — 3,000 stock-keeping units.
3). Weekly inventory changes encouraging revisits.
4). High inventory turnover. Ordering 30 days in advance keeps inventory levels low, minimizing the risk of falling margins and sales.
Francesca’s Holdings Corp (NASDAQ:FRAN) also has a debt-free balance sheet and $33 million in cash and short-term investments. Inventory is kept low, as I have already mentioned, so the company’s quick ratio stands at 2.2. That’s high for the retail sector, where a ratio of about one is considered average. Earnings per share are expected to grow 24% this year, indicating that at a trailing-12 month P/E ratio of 22.8, Francesca’s is trading at a PEG ratio of 0.9, offering growth at a reasonable price.
Furthermore, Francesca’s Holdings Corp (NASDAQ:FRAN) is highly cash-generative. Free cash flow has averaged a nominal amount of $13.5 million per quarter during the past four quarters — 29% of net income, leaving plenty of financial headroom for expansion and shareholder returns.
So, after these bull points, why is Francesca’s Holdings Corp (NASDAQ:FRAN) still a favorite of shorts?
It appears that traders are betting against the company becaue they believe its valuation is too high based on slowing comparable-store sales. However, Francesca’s is well placed for growth through other mediums, and its cash-rich balance sheet is supporting group expansion to 900 domestic locations, from 445 currently.
Indeed, the company is expecting to increase its number of stores by 23.6% this year and already has plans in place to open another 60 stores in 2014, boosting the bottom line. Overall, Francesca’s looks attractive for the longer term. The business model is sound, and cash generation is strong — a good company to buy and forget.
Demand for firearms is high
Sturm, Ruger & Company (NYSE:RGR) has 28.3% of its stock short. Now let’s forget about the ethical factor here — if you want to short a company just because it makes guns, you have no place investing in the first place. A good company will make money no matter what.
Sturm, Ruger & Company (NYSE:RGR) has a solid balance sheet, with no debt and $65 million in cash per share. Cash generation is strong, with a cash conversion ratio of nearly 100% during the second quarter of this year. The company’s gross and net profit margins have been creeping higher, growing 10% and 20%, respectively, over the past four quarters. Additionally, the company recently reported that gun sales are reaching near-record levels.
Unfortunately, it would appear that these record sales are being driven by fear, and I believe this is where the shorts think they can make their money. Political wrangling brought about by several tragic events has driven speculation that gun sales could be capped, slowed, or stopped in the US. Obviously, the public has reacted to this by buying as many guns as they possibly can before any regulation comes into place. This raises concern in the medium term because any firearm regulation would immediately put the brakes on Sturm, Ruger & Company (NYSE:RGR)’s earnings.
However, due to the support in the country for the right to carry firearms, coupled with the fact that Congress is becoming increasingly useless, I’m led to believe the demand for weaponry and related items will not slow anytime soon. This makes Sturm, Ruger & Company (NYSE:RGR) look quite attractive, considering the company’s cash generation.