RF Capital Management LLC recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 18.8% for the second quarter (net of fees), underperforming the S&P 500 Index which returned 20.5% in the same quarter. You should check out RF Capital’s 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, RF Capital highlighted a few stocks and Foot Locker Inc. (NYSE:FL) is one of them. Foot Locker Inc. (NYSE:FL) is a shoe stores company. Year-to-date, Foot Locker Inc. (NYSE:FL) stock lost 29.2% and on August 18th it had a closing price of $27.20. Here is what RF Capital said:
“Foot Locker (FL) – In response to COVID-19, the company took the necessary steps required to manage its business through the crisis. Actions taken include:
- Borrowing $330 million under the company’s credit facility
- Reducing full-year capital expenditures by 50%
- Cutting non-essential spending
- Limiting rent payments
- Extending payment terms
- Reducing merchandise purchases
- Reducing salaries and deferred incentive compensation for the CEO and senior executives
- Suspending the Q2 dividend
- Temporarily suspending its share repurchase program
Not surprisingly, the first quarter wasn’t great given seasonality and stores being closed due to the pandemic. Q1 comparable-store sales decreased by 42.8%, and the company had a net loss of $98 million and negative free cash flow of $174 million. The gross margin rate also declined to 23% while inventory was 20.4% higher than the prior-year period.
Despite weak earnings, the balance sheet remains strong with $1.01 billion in cash versus $121 million in long-term debt, $330 million drawn from the credit facility, and a market cap of $3.06 billion.
Over the next few quarters, the company should benefit from an increase in e-commerce volume. For example, FL processed 200,000 e-commerce orders in a single day this past quarter. Prior to COVID-19, 25,000 orders was considered a peak amount of orders. Additionally, the gradual reopening of stores should drive earnings as well. At the end of May, only 1,400 stores (~45% of all locations) were open with limited hours and social-distancing protocols.
Czech billionaire Daniel Kretinsky also acquired a 6% stake in Foot Locker. He clearly sees value in U.S. retail despite the industry’s continued headwinds. He also purchased a 5% stake in Macy’s. From what we’ve gathered, Mr. Kretinsky is a sharp investor who made his fortune through smart acquisitions and investments.
Although we neither added nor trimmed our position in FL this quarter, we continue to own shares. The strong balance sheet provides us with comfort knowing that Foot Locker will be able to survive this crisis and participate in an eventual recovery.”
This isn’t the first time RF Capital talked about Foot Locker Inc. (NYSE:FL) favorably either. The investment firm has been a long time Foot Locker Inc. (NYSE:FL) bull. In April, we shared RF Capital’s bullish Foot Locker Inc. (NYSE:FL) thesis in this article.
In Q1 2020, the number of bullish hedge fund positions on Foot Locker Inc. (NYSE:FL) stock decreased by about 28% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Foot Locker’s growth potential. Our calculations showed that Foot Locker Inc. (NYSE:FL) 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.