Supergroup: I’ve got some explaining to do

I've stood right behind Supergroup (SGP) since the company floated on the London Stock Exchange just over two years ago. But boy, oh boy, have these guys tested investors patience. SGP has gone from zero to hero... and then straight back down again!

It's time to catch up on this one, because this could be a defining moment for the stock.

Let's take it from the top

Back in March 2010, I advocated this stock as "One of the few flotations worth taking a look at" and it turned out to be a blast. Itwas Europe's most successful flotation for 2010. SGP soared from £5 to just shy of £20.

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And now it's back down way down! At around £3.20 it's about a third off its issue price.

In the last year, everything that possibly could go wrong has gone wrong. From having the wrong stock at the wrong time of year', to IT problems and now the latest excuse: they got their sums wrong apparently mistaking a plus sign for a negative sign in the accounts ledger.

Sometimes I feel like I'm acting like the forgiving father with an errant schoolchild.

But the situation has now got really bad. Do we dump the stock and be done with this dud? Or is this an opportunity for the brave?

Let's take a look.

Talk about management cock-ups

I try not to get emotional with stocks. In the case of SGP, I never bought in because I liked the apparel it hawks for me they could be selling coffins or cough syrup for all I care. What interests me are the figures, and in this case, I've always liked them. A high growth stock, dealing with high margin products and an incredibly strong balance sheet (no debt!) are star attractions.

Though many have consistently argued that this is a fly-by-night' brand, insisting sales will plummet once the brand passes its sell-by date, the figures coming through haven't borne out the thesis. Sure, sales growth has come off the boil. But we're still looking at a very healthy business.

The big problem with this stock hasn't so much been sales as bad management. One of the key things successful management does is to manage shareholder expectations. And that's something SGP has got very wrong.

It's incredibly exasperating to see how management has mucked things up. The guys at the top haven't coped well with this high-growth business. Having tried to do too much, too soon, they've made several schoolboy errors.

And in this respect it's great that they've now beefed up the management team. Recently SGP has appointed both a new finance director and chief operating officer.

I'm expecting the new boys to come in and shake things up. And that's important, because I still believe that the best days for this stock lie ahead. International expansion is what could be truly exciting for SGP. There's a big world out there, and if they can get things right, there could be a lot of money to be made.

The most painful decision

I suspect that many readers thought I was disingenuous when I said that selling a third of my holding in SGP (to bank a 300% gain) was 'the most painful decision'.

But it was the truth. At the time, the stock was soaring; and when that's happening it's very easy to hold on tight, thinking that you are a fantastic stockpicker'. It's tough to know when to take some profits off the table. Nobody rings a bell at the top of the market.

Now with the benefit of hindsight, it's clear that taking some profits was the right move. The stock was selling for 25 times earnings; the fundamentals told us to take some chips off the table.

What should we do now? Well it's not an easy decision. But topping up is a move I'm willing to make. Ultimately, whether you buy a stock all comes down to price. And today, this time the stock is far too cheap...

A few facts and figures

Let's look at the fundamentals. In the year ending May 2010, SGP made around £22m in profit. A year later, it was more than double - coming in at around £47m. Great stuff.

But the company is advising that profits for this year have stalled. We're told they're going to be around £44m.

Now clearly, if investors hadn't come to expect too much, this would be a fantastic result. BUT investors see this slip-up as a sign that the company's hit the wall. It's the end of the brand's life-cycle.

And who knows? Maybe they're right.

But equally, there's a chance they aren't. What if SGP's brand has staying power and as management says, today's figures are a self-inflicted hiccup. And suppose it can re-create itself on an international scale? Then you'd have to say that this is now an absolute bargain.

Yes, last year was an awful year for the group. But most of that was down to poor management for me, the figures were still fairly respectable. The analysts are forecasting profits of £50m next year, and £58m the year after that.

Now, that leaves the business trading on eight times earnings this year, falling away to six times earnings for 2014. That looks cheap to me and if the analysts are right, then we'd be looking at a dividend yield of around 4.5% too.

But more importantly, there could be some fantastic upside if the beefed up management team finally gets a grip on the business.

Bear in mind that this is a speculative punt. I'm looking at a multi-bagger if things work out, or what could be a 100% loss if they don't. Yes, the group has no debt, but it has signed up to a load of new shop leases. Leases can have a similar effect as debt many high street names have been crucified by leasehold commitments.

I also suspect that many of the stores were given very beneficial rental terms to kick them off... and those rents are likely to be subject to upward reviews. As the detractors say, things could turn on a sixpence with this stock.

But I just don't feel now is the time to sell... we took that painful decision a long while ago (when the stock was over £14!)

Now we face an equally painful decision do we buy more?

I say we do.

This article is taken from the free investment email The Right side. Sign up to The Right Side here.

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