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What does Steven Cohen see in Vera Bradley?

SAC CAPITAL ADVISORSSteven Cohen founded the Connecticut based hedge fund, SAC Capital, in 1992 and the fund has approximately $14 billion under management. SAC Capital owns the likes of, Inc. (NASDAQ:AMZN) and The TJX Companies, Inc. (NYSE:TJX), you can see all of SAC Capital’s holdings here. Steven Cohen’s fund focuses on fundamental and quantitative investment methods.

On September 7th SAC Capital increased its position in Vera Bradley (NASDAQ:VRA) from 189,320 shares at the end of June 2012, to 2,338,200 shares. This increase gives SAC Capital an almost 6% stake in Vera Bradley. In the hedge fund world, Vera has also attracted interest from other top names, such as Joel Greenblatt with Gotham Asset Management, and Jim Simons of Renaissance Technologies, both of whom initiated positions in Vera during the second quarter of 2012 (you can find all of the hedge funds that own Vera Bradley here).

Vera focuses on designing and producing accessories for women. This includes handbags, accessories and other leisure items. The weak economy and high unemployment has placed downward pressure on companies in this industry. Given almost all of Vera’s products are considered accessories, they have the unique ability to appeal to a wide range of consumers.

However, Vera’s stock price has not managed to keep pace with other companies in the industry. Over the past year the industry is up over 26%, but Vera is down over 30%. When compared to its major competitors, Vera is the only company that has seen its stock price decline over the last year. We can certainly see how Mr. Cohen and SAC Capital feel the Indiana based accessory company has been unfairly shunned by investors. The company has posted inline numbers with respect to sales and earnings, yet has been under constant selling and shorting pressure.

Analyst consensus for 2013 EPS is $1.62, which was recently reduced from $1.69, due to management’s downward revisions, and during the latest earnings announcement the company had a negative surprise, missing the estimate of $0.35 and recording an actual EPS of $0.33 for the quarter. All of these factors have placed pressure on the company’s stock price. However, nothing has fundamentally changed about the company.

Vera competes with other accessory and luxury goods companies, such as V.F. Corporation (NYSE:VFC), Coach, Inc. (NYSE:COH) and Ralph Lauren Corp (NYSE:RL). The company is trading below its competitors on a multiples basis, with Coach and Ralph Lauren trading at P/E multiples of 18 and 22, respectively, while Vera trades at a 15 multiple. The P/S multiples are 3.7 for Coach and 2.1 for Ralph Lauren, with Vera having at a 1.9 P/S multiple. We believe that all of these companies have equal exposure to the broader market and to consumer discretionary income levels, and as a result feel that Vera should be trading more inline with its competitors. The case can also be made that Vera has the greatest growth prospects given its potential for market expansion outside of the U.S.

Insiders have been purchasing the stock below the $30 mark since the beginning of the year. There were four separate insider purchases in the second quarter, all below $24. All the recent insider purchases can be found here.

The real question is what does Mr. Cohen and insiders see that other investors do not? During the first trading day after SAC Capital’s investment in Vera was public news the stock jumped almost 8 percent. We believe the company still shows promising growth and strong sales, but due to its industry affiliation as a consumer discretionary stock, the economic concerns have placed undue pressure on the stock. The pressure is also due in part to the company’s size, where having a sub-$1 billion market-cap places it at an even greater disadvantage when trying to attract investor attention.

Since Vera started trading back in October 2010, its high profile name and high profile products pushed its stock price to its all time of $50.82 in May 2011, but since this time the stock has declined to less than $23. Although the initial run up in Vera’s stock may have been more hype than anything else, we believe that the company has now overshot its fair value level and trades on the cheap side.

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