About three years ago, I came across the best stock idea of my investing life. There were just two problems: First, the company was priced in the penny stock range, which made me wary. Second, I failed to recognize the company's potential as it changed its business focus from bricks-and-mortar retailing to selling clothing by catalog and Internet. Long story short, I never bought the stock.
JoS. A. Bank (Nasdaq: JOSB) proceeded to climb steadily from the $5-ish price at which I found it to yesterday's closing price of $33.61. In three years, it became a near seven-bagger (from the term made famous in Peter Lynch's individual investing classic, One Up On Wall Street). I cannot help thinking that if I had known how to do a proper analysis of a small-cap stock's potential when I first found JoS. A. Bank, maybe today I would be smiling fondly at this memory, rather than grinding my teeth in chagrin.
The Motley Fool's Hidden Gems newsletter makes a mission of educating individual investors in the art of evaluating small caps to determine whether they are iron pyrite (fool's gold) or, well, Fool's gold. Over the next few weeks, in this space I intend to share with you, good readers, a few of the lessons I have learned from the Hidden Gems newsletters and from discussions with our teams of diligent prospectors on the Hidden Gemsdiscussion boards, and perhaps a corollary or two that I have worked out on my own. This is all in the course of evaluating various small-cap companies.
Today, for nostalgia's sake, let's begin by summarizing the results of what I call a "high-level due diligence" review of JoS. A. Bank. Next week, on Wednesday, I will go over how to conduct a similar review yourself -- how to get what Tom Gardner calls "the basic picture of a business" -- while explaining where the following numbers came from.
| JoS. A. Bank |
|
| Market capitalization |
$332 million |
| Enterprise value-to-free cash flow |
Negative |
| Historical earnings growth |
38% |
| Projected earnings growth |
22% |
| EV/FCF/G |
Negative |
| Return on equity |
25% |
| Insider ownership |
19% |
| Share dilution |
9.3% |
Based on the above numbers, JoS. A. Bank does not appear to make the cut for
Hidden Gems status. Look at any of its competitors, from the biggies like
Federated Department Stores (NYSE: FD) or
Gap (NYSE: GPS) to companies a little closer to JoS. A. Bank's weight class, such as
Men's Wearhouse (NYSE: MW) or
Phillips-Van Heusen (NYSE: PVH), and you will see a more compelling investment thesis.
At least on the surface, that is. We'll talk more about that next week as well. Until then, Fool on!
Fool contributorRich Smithbuys all his suits at JoS. A. Bank (yes, really), but owns no shares in the company or in any of the companies mentioned here.
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