Trapeze Asset Investor Letter: Sticking With Foot Locker (FL), Bails on Dicks (DKS)

Trapeze Asset Management released its second-quarter investor letter recently, which detailed some of the fund’s moves during the period. With the U.S stock market at all-time highs, the fund found it challenging to unearth bargains. It also sold off a number of positions as the prices on those stocks ran past the fund’s fair market value (FMV) estimates.

Toronto-based Trapeze was established in 1999 by co-founders Herbert and Randall Abramson. The fund builds focused individual portfolios for each client based on model portfolios which are then adjusted to meet the client’s specific requirements. Portfolios are typically all-cap or large-cap-only oriented, with Trapeze’s all-cap portfolios currently having a lot of exposure to small-cap stocks, which are trading well below the fund’s FMVs for them.

In this article, we’ll take a look at the fund’s thoughts on five of its key positions, or former positions: Total SA (ADR) (NYSE:TOT), Oracle Corporation (NYSE:ORCL), Dicks Sporting Goods Inc (NYSE:DKS), Foot Locker, Inc. (NYSE:FL), and Dollar Tree, Inc. (NASDAQ:DLTR).

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First up is Total SA (ADR) (NYSE:TOT), which Trapeze Asset Management believes is primed for free cash flow and production growth, even if oil hangs around the $50 mark. The fund likes Total’s moves to shed its high cost assets like Gina Krog, and expects that others in the same vein like Fort Hills and Martin Linge will follow. It also likes the company’s expansion of its low carbon production, which Total believes will deliver 20% of its profits by 2030. Analysts also like Total’s recent acquisition of Maersk, pointing out that it will be immediately accretive and helps rebalance the company’s portfolio.

Trapeze has a $58 FMV on Oracle Corporation (NYSE:ORCL), which currently trades around the $48 level. The fund sees Oracle’s cloud revenue shooting past the $5 billion mark soon and anticipates that as cloud revenue accounts for more of Oracle’s total revenue, the company’s margins will also rise. Additionally, it expects Oracle’s FCF to grow at twice the rate of its revenue. Oracle CEO Mark Hurd is confident that his company can win the cloud wars, despite the imposing specter of Amazon.com, Inc. (NASDAQ:AMZN)’s AWS looming over it, telling CNBC that “I think we’re going to win, bar none.”

On the next page we’ll check out the fund’s take on Dollar Tree, Inc. (NASDAQ:DLTR), Dicks Sporting Goods Inc (NYSE:DKS), and Foot Locker, Inc. (NYSE:FL).

Trapeze is bullish on Foot Locker, Inc. (NYSE:FL), though like many other investors, it was shocked by the sudden about-face from the company’s management regarding its second-half performance. After initially forecasting second-half growth in the low-single-digit range, Foot Locker pulled the carpet out from investors during a sobering second-quarter earnings calls. Comps fell by 6% year-over-year during the quarter and the company was forced to alter that previous forecast to a second-half earnings decline of 20% to 30%. Trapeze is nonetheless hanging with the stock, anticipating positive comps in 2018 on the back of innovative product launches, though it did lower its FMV on the stock to $45 from $70. Foot Locker currently trades hands at $34.41, with shares down by over 51% this year.

Trapeze revealed that it sold off its position in Dicks Sporting Goods Inc (NYSE:DKS), citing the fact that the stock had fallen below its TRAC floor. Shares of Dicks have plummeted by 48% this year, as like Foot Locker, it forecast a dire second-half of the year. As RBC Capital noted, consolidation within the sports equipment and apparel industry, including the bankruptcy of Sports Authority, have lead to an unpredictable pricing environment in the sector, as well as elevated inventories (Dicks’ total inventory was up by 11.8% at the end of Q2). Wider distribution of key brands and heightened promotion from competitors are also putting greater pressure on Dicks.

Trapeze has a $95 FMV on Dollar Tree, Inc. (NASDAQ:DLTR), which is currently trading at $89.42, having surged by 35% since early-July. Trapeze sees Dollar Tree as having a big opportunity to capitalize on the shoddy nature of many Family Dollar (which it bought in 2015) locations by improving their standards. Trapeze sees the potential for both a big boost to earnings (federal corporate tax cut) and potential hazards given the company’s heavy debt load of $7 billion (changes to interest rate deductibility).

Disclosure: None