Normally Antoine looks like the kind of guy you wouldn't hesitate to ask for directions.

This was not the case last Thursday, when it looked more like RanXerox, watching Five Below lose 25% after a Profit Warning and the announcement of the CEO's departure.

 

He had about this much in front of his screen:

What happened ?

We went in at the end of June after a good correction:

 

Five Below

Source : investing.com

 

But on Thursday it was discovered that there was a second basement in the car park:

 

Five Below

Source : investing.com

 

Five Below's business is quite simple. It's an American discount chain that sells most of its products for $5 or less, hence the name. Their main target? Teenagers and young adults, who tend to be low-income customers.

 

The group went public in 2012 at $17. At the time there were 200 shops, today there are more than 1,600. In 12 years, sales have grown by 13 times and profits by 20 times, so that's quite a lot of growth.

It is precisely this status that has made it one of Covid's stars: the share price has risen from $120 at the end of 2019 to $220 in 2021, when comparable growth was in excess of 30%.

So when a fall in growth was announced at the start of the year, the slide began. We invested when the share price was down 50% YTD and the value was close to 20x earnings, an unprecedented level outside Mars 2020.

But the slide was not over. Last week, we saw a repeat of the slide, with the announcement of a sharper-than-expected decline and the departure of CEO Joel Anderson: a third of the company's market capitalisation was traded and it was down 25% on the day.

The next day, we learned that Joel Anderson had in fact signed for Petco, but he hadn't been fired at all. Firstly, the signal is not the same.

 

Then we went back to our file and redid our calculations. Our opinion is that at the level at which it fell, the share price does not really reflect the value of the group. Five Below has huge growth potential ahead of it: 1,600 shops today compared with 20,000 for Dollar General, for example. There's plenty of room! The profit warning was relatively minor. Of course the US consumer is suffering. But that doesn't mean they're going to disappear. What's more, the balance sheet is extremely healthy, with no debt. Putting everything together, we finally decided that at that price we could afford to add a small ladleful (1% of the fund) of Five Below. Be warned: the list of managers who have been hurt by averaging down is a long one. But in extreme cases, you can - reasonably - break the rules. That's what I'll be putting on the back of my denim jacket at Patrimonia - RanXerox would have liked that.

 

Market and portfolio focus

New heading

Po Shen Loh, the coach of the US national maths team, is right to say that in order to defend ourselves against the arrival of AI, we need to learn to think ‘outside the box’. That takes a bit of practice. Let's get started together with a little mental exercise each week. Here's the first one:

We've got a little exercise for you this week: how do you make 4 equilateral triangles with 6 matches?

Behaviour:

Despite two blips this week and -1.4%, the Monocle fund is doing better than the CAC 40 (-2.5%) and the S&P 500 (-2.0%).

The two snags were Teleperformance, which we told you about last week, and Five Below, the subject of today's post. They cost us 25bps and 90bps respectively.

On the positive side, we should mention two major net contributors, Aurora Innovation - which we told you about in this Note - with 50bps, and Tidewater, with 20bps.

Lines:

Quite a few moves this week. First, we added 1% to Five Below for the reasons described above.

We also took a position in Magnite (1%) after Netflix strengthened its partnership with the digital advertising platform.

We also bought put options on Costco, the US supermarket chain (warehouse club). At more than 50x earnings, the stock has never fetched such a high price. At this level, the slightest pothole and it's an accident, and there's no airbag.

But the big story this week is our 8% position in LVMH. After the sector's results, the stock has fallen sharply and we have reached a PE 2025 valuation of 20x, at historic lows. We are partially hedging our position by buying put options on Hermès: if LVMH is squeezed, its competitor should be too.

On the other hand, we have halved our holdings in Berry Global and Brembo to 2% of the fund each.

Then we launched our Capri line. In 3 weeks' time, it will be a year since Tapestry made its bid for the owner of Michael Kors, Versace and Jimmy Choo. This is an important date because the merger has not been finalised, so from 10 August - ‘the outside date’ in the jargon - each party is free to withdraw. We think that this scenario is quite likely, and that in such a case, Capri's share price would take a beating. We prefer to get out.

Last move of the week, we cut our short position on the S&P 500, taken to bring our net exposure below the regulatory 49%. After the multiple sales of recent weeks, we no longer need this short position to be in line. We are exiting this position but retaining other insurance, notably via our exposure to US long rates.

Today, our gross equity exposure is 47% (net 43%). We remain with our position in US long rates at 32% and our corporate bonds at 13%.

 

See you next time

Charles