Superdry is super cheap

Superdry models © Superdry
Group sales have doubled in five years

The upheaval in the Superdry boardroom has obscured a healthy business.

The last 15 months have been a disaster for shareholders in the fashion chain Superdry. After several profit warnings, the stock has fallen by 75% from its peak in January 2018. What’s more, the company has been buffeted by a very public fight between the original founder Julian Dunkerton and the management team that took over from him in 2014. Accusing chief executive Euan Sutherland of destroying the brand, Dunkerton tried to return to the board of directors.

However, after he was narrowly elected in early April, the other directors, including Sutherland, quit en masse, so Dunkerton became the new chief executive.

Superdry’s problems certainly make for entertaining reading, but the collapse in its share price seems overdone. Not only has it enjoyed strong growth over the past five years, with sales more than doubling from £360m to £872m between 2013 and 2018, but the trend looks set to endure for the next few years.

While margins have been narrowing, the firm is still profitable enough to make a return on capital of nearly 20%. Debt levels are also very low, with profits more than 2.5 times larger than interest payments, so it’s unlikely to end up in financial distress anytime soon.

Back to basics on clothing

Of course, there is always the risk that consumers could tire of Superdry’s style of clothing. Indeed, shortly before he resigned, Sutherland admitted that there had been a “lack of innovation” in the type of products the company was offering. However, if anyone can breathe new life into the franchise, it is Dunkerton, who built the company up from a market stall more than

30 years ago. In particular, his strategy of refocusing on hoodies and jackets, getting co-founder James Holder involved with design again, and improving the range of online choice, seems to offer a clear way forward. Dunkerton has also come up with several ideas for improving Superdry’s overseas performance. His basic strategy of focusing on the branded clothing that the chain is known for makes a lot more sense than trying to reinvent the company as a “global lifestyle brand”, which was Sutherland’s approach.

Besides, at current prices it’s a bet worth making. Superdry trades at only 7.7 times 2020 earnings and is at a 10% discount to its book value (the value of its net assets). It also has a very generous dividend yield of 5.8%.

Next, by contrast, which is growing at a much slower rate, trades at 12.2 times 2020 earnings and has a much lower dividend of 3%. Perhaps the only argument against investing in Superdry is that the shares could go even lower in the short term before they start to recover.

I’d therefore suggest that you wait until the price hits 500p (at £8 per 1p) before buying in, which you can do through a buy stop order. In that case, I’d set the stop-loss at 375p, giving you a downside of £1,000.


Trading techniques: IPOs fizzle fast

Uber’s flotation next month is a huge event, with the ride-hailing service releasing its prospectus last week. Investors who manage to buy into initial public offerings (IPOs) during the subscription phase tend to do well, at least initially. Research by Jay Ritter of the University of Florida has found that from 1980-2015 shares in 8,178 newly listed US firms would rise on average by 18% in the first day of trading. In 2001 and 2008, both dismal years for the US stockmarket, investors would have made money if they had blindly bought into IPOs at the subscription price and held for a day.

The main reason for this is that, since investment banks agree to buy any unsubscribed shares, they have a clear incentive to keep prices low. Some banks may also want to use the allocation of shares to reward their clients. The management may also want to keep the offer price low in order to keep shareholders happy.

However, IPOs’ performance after that glorious first day tends to be much worse: Ritter also found that those who had bought at the first closing price and held on to the stock for three years would have lagged the market by a total of 18.4%.

Shares that do either very badly or very well in their first day of trading are particularly good short-selling candidates. Laurie Krigman, Wayne Shaw and Kent Womack found that between 1988 and 1995 the best subsequent performance came from shares that rose in price between 0% and 60% on their first day. Those that did either better or worse had much lower returns.

Finally, look at the behaviour of large institutional investors who subscribed to the public offering: if they promptly dump their stock, it bodes ill for the share price.


How my tips have fared

Over the last four weeks, most of my long tips have moved in the right direction, with six of them rising and only two falling. Cineworld has risen from 297p to 308p and John Laing Group from 391p to 399p.

JD Sports has shot up from 495p to 520p, Hays has gone from 155p to 159p, Safestore from 593p to 627p, and Bellway has increased from 3,104p to 3,174p. The only stocks that declined were Greene King (to 664p from 673p) and Somero (from 391p to 360p). Collectively, then, my long tips are making a combined profit of £3,293. My recommended shorts turned in a more mixed performance. One the one hand, Just Eat fell from 739p to 735p, while Tesla’s share price declined from $269.49 to $267.70.

But on the other, Rightmove increased from 500p to 529p. Bitcoin also increased from $3,970 to $5,070 and Twitter is now $34.37 (from $31.08). The increase in both bitcoin and Twitter took them above the adjusted stop losses of $4,250 and $33 respectively. If you had followed my advice they would now be automatically closed, with the bitcoin position making a profit of £1,744 and the Twitter position making a small profit of £19.

Since the position in Just Eat is making a loss after six months, I suggest you close it, taking losses of £207. You should also increase the stop losses on the long positions in Greene King and Cineworld to 625p and 275p respectively. The stop loss on John Laing Group should also be raised to 325p. I still have 12 open positions (nine long and three shorts) when you include Superdry, so others will need to be culled as well. Overall, my open tips are making a profit of £3,136, which is comfortably more than the £1,808 in losses from all my closed positions.