Left Brain Thinking Podcast: Another reopening play

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. Now today we're talking about a reopening play that is the subject of a First Focus report at leftbrainir.com. And we're having that discussion with Brian Dress, Director of Investment Research at Left Brain Investment Research. By the way, Brian and the team at Left Brain, well, they've opened a new mutual fund that puts all of their left brain thinking into one investment vehicle. And you can learn more about it at leftbrainwm.com. Brian Dress, great to chat with you again.

Great to be with you, Chuck.

The stock you're looking at this week is a reopening play, but it's not necessarily like this is the reopening play that everybody's heard of. Explain why you are interested in Revolve Group, ticker RVLV.

Chuck, you always hear us talk about the securities evaluation application Jarvis that we use. Last week, RVLV ranked number 4 in the, in the most recent Jarvis run, and Jarvis looks at both earnings and stock price momentum. So that set off some flags for us that we wanted to take a look at RVLV. It's an online platform for selling apparel, accessories, beauty products, and luxury products. And it targets Gen Z and millennials. So kind of the new breed of consumer and also has some in-house brands. And this might be a little bit of an eye-roll inducer for you, but their marketing strategy includes social media influencers to keep their status as an on-trend platform. So they're really kind of on the cutting edge of selling apparel in the online space.

But the classic reopening play, what we've heard about is people wanting to get back to stores. I mean, yes, there's pent-up demand and that's gonna play out every place, but an online retailer right now, there's gotta be more to it than just this is a reopening play.

Yeah, so it's interesting. This company's been public since 2017, but an average growth rate above 20% in all the years before the pandemic. This company was actually really hit really hard in the 2020 fiscal year as people were, you know, not going out and working from home. So that really took them out of the apparel business. And so what we've seen in Q1, quite a bit of return to growth, back above 20% growth in Q1. So we see that momentum's coming back as folks start to work outside the house and go out. Definitely starting to work well for RVLV here.

If somebody goes and looks at a chart on Revolve Group, they're going to see the stock has recovered. I mean, it's a reopening play that has gotten back to record highs. So explain why Jarvis and you Don't worry that, hey, I'm buying in at a peak.

Yeah, we don't look at things that way. This company is a little bit under $5 billion market cap, so it's kind of an early stage. So we think there's a lot more room to grow here. We tend to look against that sort of thinking, oh, this company's up 100%, it's time to sell. Actually, when you're in the growth stock arena, it's actually kind of a good sign that things are going forward, especially when we see that growth rate returning to trend. And we see an increasing percentage of repeat customers and continually adding product categories. Not only that, we really like the business model here. This company uses data analytics to manage inventory efficiently. The way they start is, you know, when they start with a new vendor, they make small buys initially on new products, and then if that works, they start to buy more. Like I told you, the growth rate's returning to above 20% in Q1. But inventory actually contracted at that time. So we see a really efficient company here and actually has 7 straight quarters of positive EPS, which is pretty remarkable given how difficult 2020 was for them. We see a lot of the factors that we like, you know, accelerating revenue growth. We see expanding margins and a potential category-defining company. You know, we're not really too put off by the fact that it's really done well at the beginning of 2021. We think there's really more room to run here.

This is a really interesting question that I'm about to ask Brian. And I can tell you honestly, in all my conversations with left-brain folks, I've never asked this question, but as I look at Revolve, I noticed that about 11% of their float is shorted, which is not an enormous amount, but it's more than a lot of companies. Now, of course, we're living in this era of meme stocks and would-be meme stocks. And do you want to play short squeezes and things along those lines? Are you looking at the short and considering it at all? And if so, given that if it happens to have a short squeeze, that would help you. Is that at all a potential benefit or again, a non-factor? Let those other guys short it. We think we know where it's going.

So we've become aware of this concept pretty much in 2021. We don't look at the short interest as a defining characteristic for companies. What we've noticed and observed is that sometimes it does throw fuel on the fire of an already growing company whose stock is performing. But really, we don't play that game. Not to say we haven't been in stocks that have been caught up in that meme craze, but that's really not part of our process at all, right?

So at that point, it really doesn't change your thesis. It might— and this is where I wanted to drive with it— I mean, if we were to see a Revolve group gets squeezed. And these days there are actual short squeezes and meme stocks.