Back in early 2001, I was working in New York City and stumbled across a men's clothing store called Jos. A. Bank Clothiers
The company had 100 stores, with plans to expand. Its net income had jumped 70% year over year. Even though its net margins were a paltry 2.5%, I saw that free cash flow was almost $11 million, while the company's enterprise value was only $36 million, which gave it an EV/FCF ratio of 3. That suggested the company might be undervalued, especially since it was also buying back shares. I followed suit and put in an order to buy shares myself.
I wore the Jos. A. Bank suit to my engagement. Everyone asked me where I'd bought it. Word must have gotten out, because the stock has soared 10-fold since then.
Too bad I sold.
Well, not so bad, since I did manage a four-bagger out of it. Nothing to be ashamed of. But in early 2002, the stock had a heck of a run. Earnings bumped up another 30%. Net margins increased to 3.1%. The selling point? Sales had increased only 8%, while inventories had rocketed 30%. I was already skittish about clothing stocks, having been burned in the past by Abercrombie and Fitch
Since then, both sales and earnings have more than tripled. The company is still growing earnings at a 75% clip, trailing 12-month net margins are 6.36%, and the stock -- sigh -- went from a four-bagger to a 10-bagger after I sold.
The lesson? Retail is a tricky business, and so is trading retail stocks. That big rise in inventories was likely due to an expected increase in business. Jos. A. Bank continued to expand after I sold and now has 250 stores. Deciding what to buy or sell should take at least as much time and effort (ideally, much more) as choosing a well-tailored suit. In my case, I threw Jos. A. Bank stock back on the rack before its time.
Fool contributor Lawrence Meyers does not own shares in any companies mentioned in this article, and it takes great effort to get him to wear a suit.
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