Buying Shorts
28 March 2023
After spending our days searching for something to buy, without success, we ended up finding something to sell.
For a patrimonial fund like Monocle, it is useful to have some short positions that will serve as a safety net in case of an accident. To avoid paying too much for these protections, one must find overvalued stocks that have been somewhat overlooked by a market distracted by the high-end products.
Here's one such stock: Hugo Boss. The share price of this German jacket manufacturer is at €60, the same level as before COVID. In terms of performance, after a slump in 2020, Boss achieved good results in 2021 and 2022. However, these positive results were driven by the unique context of the post-pandemic recovery: an influx of customers who hadn't been able to make purchases for several months and therefore had fuller pockets.
It won't be the same in 2023: pockets are now empty, and inflation adds an additional brake. Studies predict a significantly more cautious consumer in 2023, even in the luxury segment. Moreover, Hugo Boss primarily sells jackets, and one could say, "Das veste": you can run over them with your car, and your jacket will remain intact. So, I would be surprised if someone who stocked up on their products a few months ago has an urgent need to renew their purchases.
The problem is that Hugo Boss starts this difficult year, 2023, with very high inventory levels. These stocks represent 27% of sales, compared to 22% before the pandemic. We have seen the same issue with other companies like Nike and Target. The solution is to offer discounts to reduce the inventory. By doing so, the revenue is maintained, but the profit margins are halved. Typically, in response to this, the market also reduces the valuation multiples. This leads us to a target price of €24 for Boss. Yesterday, we bought Put options with a strike price of 40, expiring in December 2023. They will be worth €16 if the stock ends at €24. We paid €0.80 for them. This translates to a 20X return, representing a profit of +1% for the fund. I really like this multiple.
Disclaimer
This presentation is a promotional document. The content of this document is communicated by and is the property of Monocle Asset Management. Monocle Asset Management is a portfolio management company approved by the Autorité des Marchés Financiers under number GP-20000040 and registered with the ORIAS as an insurance broker under number 10058146. No information contained in this document should be construed as having any contractual value. This document is produced for information purposes only. The prospects mentioned are subject to change and do not constitute a commitment or a guarantee. Access to the products and services presented here may be subject to restrictions for certain persons or countries. Tax treatment depends on individual circumstances. The fund mentioned in this document (Monocle Fund SICAV) is authorized for marketing in France and possibly in other countries where the law permits. Before making any investment, it is advisable to check whether the investor is legally entitled to subscribe to the fund. The risks, costs and recommended investment period of the funds presented are described in the KIDD (key investor information documents) and the prospectus, available free of charge from Monocle Asset Management and on the website. The KIDD must be given to the subscribers before the subscription. Past performances are not a reliable indicator of future performances. Monocle Asset Management cannot be held responsible for any decision taken or not taken on the basis of information contained in this document, nor for the use that could be made by a third party. The investor may lose all or part of the amount of capital invested, as the funds are not capital guaranteed.
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