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Kontoor Brands (KTB) Has Fallen 27% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Curreen Capital’s top stock picks. Curreen Capital, an investment management firm, is bullish on Kontoor Brands Inc. (NYSE:KTB) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Kontoor Brands Inc. (NYSE:KTB) stock. Kontoor Brands Inc. (NYSE:KTB) is a clothing company.

In July 2019, Curreen Capital had released its Q2 2019 investor letter. Kontoor Brands Inc. (NYSE:KTB) stock has posted a return of -27.3% in the trailing one year period, underperforming the S&P 500 Index which returned 16.2% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, Kontoor Brands Inc. (NYSE:KTB) stock has fallen by 40.0%.

In Q2 2019 investor letter, Curreen Capital said the fund posted a return of 6.1% in the second quarter of 2019, outperforming the S&P 500 Index which returned 4.3% in the same period. Let’s take a look at comments made by Curreen Capital about Kontoor Brands Inc. (NYSE:KTB) stock in the Q2 2019 investor letter.

“We bought shares of Kontoor, which you may remember from our Q1 letter – where I described the business as an airplane falling out of the sky.

So… why did we buy it?

Because it fits our investment strategy: it is a good business, managed well and on behalf of shareholders, where our purchase price offered an attractive upside-to-downside ratio.

Kontoor sells Wrangler and Lee jeans, and that is a good business – generating 20%+ returns on capital. It is not a growth business – their revenues and earnings are about the same as they were in the mid-2000s, and the late-1990s for that matter. Throughout these years, Kontoor’s jeans business has been treated as a cash cow, funding growth and acquisitions at its parent, VF Corp. Kontoor is likely to continue to be a cash cow, and now its earnings will flow to debt repayment and shareholder dividends.

I like Kontoor’s management – CEO Scott Baxter previously ran the business—well—and was promoted to run sexier parts of VF (including the cooler and faster-growing Vans and North Face brands). He then chose to return to the jeans business, and have all of his VF stock options convert into Kontoor stock options. I like this a lot – he knows the business, has successfully run it before, and has chosen to return to it and tie his own wealth to its success. This is also his shot to show what he can do as a CEO. I am a fan of this combination of demonstrated ability and personal and financial incentives to drive success.

I am also a fan of the board of directors – the Chairman was VF’s CFO from 2005 to 2015, a period in which VF successfully grew, through acquisitions and internal investments, without diluting shareholders. I believe that part of that limited dilution is due to the share ownership of the founding Barbey family, which is represented on the board by Juliana Chugg. A large founding family shareholder is often evidence of both an excellent business and that the family have been good capital allocators – only a durable business and a capable family can prevent a large shareholding from fading with time. As the family representative, Ms. Chugg’s presence on the board gives me confidence that Kontoor will be friendly to shareholders – avoiding excessive share dilution and other actions that benefit management at the expense of shareholders.

While I like Kontoor’s business and management, I was initially put off by its stock price. It began trading in the when-issued market at $40.50 per share, which implied an unattractive upside-to-downside ratio. Then VF shareholders realized that they owned a company that sold sub-$20 jeans at Walmart, and they sold and sold and sold. After all, if you are excited by the prospects of Vans, North Face, Timberland, Dickies, and VF’s other cool brands, it might be hard to stomach owning a company that sells Walmart jeans.

I love spinoffs like this. The parent company does something exciting and cool, and the spinoff does something boring or unpleasant. Perhaps the parent company CEO damns the spinoff with faint praise, but regardless – the shares are sold almost as soon as shareholders realize that they have received them.

That is when we show up – having already researched the company, evaluated it on the basis of our three key criteria, and decided that it is actually wonderful. An ugly duckling—with high and sustainable returns on capital, run by a capable and shareholder-friendly management—cast aside for being a bird of a different feather.

As with any investment, there are issues at Kontoor, particularly at Lee, which has been performing poorly in the past few years. Chris Waldeck runs the Lee business and bears watching. His previous role at Reebok does not inspire confidence that he can turn Lee around, and I imagine that he is on the hot seat. Nevertheless, I think that Kontoor’s CEO has the ability and incentives to make any changes that become necessary, and at the $28.64 that we paid for our shares, our downside is limited even if Kontoor struggles to regain traction.

Kontoor fit each of our three key criteria and we made it a 5% position – similar in size to GetBusy and Kopparbergs. As much as I like Kontoor, I was unwilling to sell shares of any of our big four positions (TopBuild, Garrett, Nilorn and MicroFocus) to buy it.”

Pixabay/Public Domain

In August, we published an article revealing Curreen Capital’s bullish investment thesis on Kontoor Brands Inc. (NYSE:KTB) stock in its Q2 2020 investor letter. This suggests that the investment firm has been bullish for a long time on Kontoor Brands Inc. (NYSE:KTB).

Our calculations showed that Kontoor Brands Inc. (NYSE:KTB) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.