Qualivian Investment Partners is Betting on TJX Companies (TJX) Stock

Qualivian Investment Partners recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund’s performance in Q2 was ahead of the S&P 500 by 9.6% and 9.5% on a gross and net basis. You should check out Qualivian Investment Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Qualivian Investment Partners highlighted a few stocks and TJX Companies Inc (NYSE:TJX) is one of them. TJX Companies Inc (NYSE:TJX) is an off-price department store corporation. Year-to-date, TJX Companies Inc (NYSE:TJX) stock lost 12.4% and on August 24th it had a closing price of $53.41. Here is what Qualivian Investment Partners said:

“TJX: TJX’s Q1 2020 (ending April 30) was in the middle of the COVID related shutdown. The stock sold off with much of the retail sector. It reported EPS well below consensus driven largely by far worse than expected gross margins. Most of the gross margin erosion came from weaker merchandise margins on lost sales and a $500 million inventory write-down on seasonal merchandise, with the balance coming from store shutdowns. Management has taken steps to maximize liquidity since the beginning of the pandemic, such as drawing down $1B on their revolver and suspending share repurchases. Most notably, TJX suspended both their Q1/Q2 dividends (but remain committed to the practice over the long term), as well as meaningfully lowering their FY 2020 capex plan to $400-600M (from $1.4B) as they lowered their planned store openings to 50 (from 70).

Despite the COVID headwinds, TJX off price model remains one of the best in retail and a model that is still not fully understood by many investors. Some are skeptical that a business that sells surplus inventory can continually find supply. Wouldn’t manufacturers of retail goods get their supply chains in order and stop producing surplus inventory? The answer is no because the economics of surplus clothing are quite different from the economics of surplus industrial goods. When clothing goods are manufactured overseas with a six month or so lead time, and very low incremental cost of production, it is optimal to over produce, with the comfort factor that you can sell excess product to TJX (at a discount) rather than miss out on large profits that accrue when retailers re-order a bestselling product. Department and apparel stores do not disclose this policy, so investors are less familiar with it.”

Last month, we published an article revealing that Brown Advisory trimmed its position in TJX Companies Inc (NYSE:TJX) stock to account for current headwinds.

In Q1 2020, the number of bullish hedge fund positions on TJX Companies Inc (NYSE:TJX) stock increased by about 21% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with TJX’s growth potential. Our calculations showed that TJX Companies Inc (NYSE:TJX) isn’t ranked among the 30 most popular stocks among hedge funds.

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Video: Top 5 Stocks Among Hedge Funds

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