Left Brain Thinking: December 2, 2020

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're talking about retailing around the holidays, and while this is the fast season for retail, you might not expect retail stocks to be growing fast enough for Left Brain's Chief Executive Officer Nolan Langford. But he's here to discuss what he sees on the horizon for retailers and how some of the issues in the space might surprise you with their growth going forward. You can learn more about LeftBrain and its processes at leftbrainir.com, and they're on Twitter @leftbrainir. Nolan Langford, great to chat with you again.

Happy holidays, Chuck, and it's always a pleasure to be on the show.

Retail. Even though this is the time of year for retail, given everything that we've been through and everything else, this is not the area I would have expected, but I love a good holiday surprise, Nolan. So why are you looking at retail? What are you seeing happening? And are there some holiday surprises when it comes to retail stocks?

Yeah, it's a really good question. And as we think about Thanksgiving, We're all thinking about Black Friday as we just stuffed our guts over the long holiday. And for most of us, it's the first day we think about putting up the tree. So it ushers in the holiday season. And for us here in the US, what we think is shop till we drop. And in this year, the year of COVID we're really, really interested in consumers, how they hold up. And how this Christmas season shakes out from a spending standpoint. Those things are just generally what we're interested in, but specifically what drives us to retail now is technology. Jarvis, our securities evaluation application, has been ringing the bell that retail is starting to make a move, hence our interest.

That said, this is seasonal. You're looking for stocks that can, as we always say, double in 2 to 3 years. Do you think that there are retailers, especially bricks and mortar retailers, that have the potential to meet your growth needs?

Yeah, that's interesting. I think when you think about the ponds that we fish in, we're looking for— you're right— stocks that can double in 2 to 3 years. And you're generally going to have one or two categories of stocks. One are just categories that just are flat out really good performers. If you look on the year-to-date and you look at the number of stocks that we follow that are up 100% or more year-to-date, we have a long and growing list of those that are up 100% year-to-date, and we have some that have tripled year-to-date. Year-to-date. And so they're falling generally one of two categories historically. One is just strong performers, businesses that either weren't impacted by COVID or maybe they were already strong and they got stronger during COVID Those are just going to power through. But the second category where historically you have done very, very well is these turnaround candidates where these were historically strong businesses and strong markets and because of some temporary factor, you have an opportunity to swoop in and do very well in a short period of time. Not that different than, you know, if you look at the real estate business or REITs in the early 2000s after the tech bubble burst, or oil. If you look at the Forbes list, there's been a ton of people on the list from the oil business. Historically, oil has been the number one driver for booms and busts. But in this case, for traditional businesses that are strong businesses, where you get a temporary opportunity, those are also prime candidates for stocks that can double in 2 to 3 years. And we think the retail sector, specifically these two names that we're going to discuss, are very, very interesting from that point of view.

So let's get to the names. I think our audience will be very interested to know what retailer stands out to you.

So this may be a surprise to some people. The stock is LB, and most people will know the business by the names at the mall. So if you go to Bath and Body Works at the mall, or you go to Victoria's Secret or Pink, those are all brands of this conglomerate of LB, which is an abbreviation for Limited Brands. And so that's the first name on our list. As consumers return to the mall, not necessarily in droves, but trickle in, what we've noticed from Limited Brands is they are always at strength at the Bath and Body Works division, but historically what they had been hampered by is the slow growth at Victoria's Secret. There was some company-specific issues at that part of the business that really made that entire business suffer. And then came COVID, which made it worse. But since then, the fortunes have turned around quite nicely, not only at Victoria's Secret, but there was a turnaround team brought in. And based off the third quarter earnings, not only have the fortunes improved, but the business trends are accelerating just in time for the holidays. So LB is the name that we like from a stock and an income perspective, Chuck.

So that's L Brands. You mentioned two stocks, and I know that the second one's not necessarily a retailer, but it's related to L Brands.

Yes, and the second one most people will know is Simon Property Group. SPG is the ticker. It's the largest mall owner in America, and again, all of those retailers have to be housed somewhere in the physical world. Like most people will recognize, on Cyber Monday, sales are growing rapidly in the digital world and online. There's only one problem. Online retailers, they do a lot of sales but no profit. The retailers that make the profits are the retailers at the mall. The number one mall owner, Simon Property Group, just got stronger because not only do they own all the Class A malls, the second largest operator in the group was Taubman Group, TCO is the ticker, and Simon Property Group just completed its merger and purchased Topman Group, and that deal should be closing any moment now. So through the COVID crisis, leaders and the strong do as they should, which is to get stronger. So Simon Property Group, which still has a very juicy dividend yield, we think is going to grow stronger in the years ahead, and that'll be another way to play retailers.

But Simon Property Group, I have a tough time believing that that's truly a left-brain stock. I mean, because you guys are growthy, you're not value, it's been beaten up. To you, is a comeback story a growth story as opposed to a value story?

I think part of the problem is we have no understanding of what you mean when you say value or growth. Again, we tell you what we're looking for right in the tagline. We're looking for stocks that can double in 2 to 3 years. We're not looking for labels. We go where the facts lead us, and the facts are Simon Property Group's a family-run business run by David Simon, who operates as if Simon Property Group is his own capital. That we like. We like the fact that they continue to pay that cash dividend even through the worst of it. We like that they have the best balance sheet in the sector, and we really like the valuation that we're getting this business on. And I'll tell you what, we really like the craftiness of Simon and his group where they've gone in and took some of these failing retailers like Forever 21 and even this JCPenney deal. I know it's controversial, but I think when it's all said and done, this joint venture, I think they're going to do very well because of it. So this is a stock we like. I think when you look back, we say it's the classic definition of something that could double in 2 to 3 years. And I don't even think you need to play the stock if you don't like. What we like is we actually like the long-term bonds for Limited Brands. They have some very long maturity bonds that mature in 20 years plus where you're still getting 6 to 7% yields. In a world where the Treasury market says there's never going to be inflation, we think those yields look really, really juicy, particularly for our underlying business that's getting better.

Nolan, great stuff. Always is. Thanks so much for joining me to talk about it. We'll talk to you again soon.

Happy holidays, my friend.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. Our conversations are not personalized investment recommendations, but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe, and you can learn more about my weekday podcast at moneylifeshow.com. Thanks to my guest, Nolan Langford, the chief executive at Left Brain Investment Research. Learn more about the firm and its analysis at leftbrainir.com and follow on Twitter @leftbrainir. Left Brain Thinking is available every Wednesday. Please subscribe on your favorite podcast app and plan to put your left brain thinking cap on every week. Until next Wednesday, stay safe and healthy, everybody.