The Bowden Group’s Family Jewels

This weekend, I spent an evening with ASU’s Bowden Investment Group after traveling with a group of these students to Toronto for the CFA Research Challenge.  I consider myself fortunate to have worked with such a hardworking and energetic team and am quite proud of what they’ve accomplished this year.  Many thanks to Dave and Cathy for hosting dinner for the students’ families at their home on Friday evening.  I look forward to next year’s party!

Truth be told, this is the first year that we have been on the same side of the trade as the North Carolina Challenge’s subject company.  I suppose there’s a first time for everything.  Accordingly, we took a long position in Family Dollar (FDO) in the face of a barrage of Wall Street downgrades, after the company reported a disappointing first quarter.  As is often the case, bad news in the short term can create long term opportunity for patient investors.  In this particular case, a sloppy report from Dollar General followed by a weak quarter at Family Dollar, resulted in a 25% drop in FDO shares over a matter of weeks earlier this year.  We’ve owned FDO in the past, but had sold the stock as it approached our estimate of intrinsic value.   This year’s plunge provided us with a fresh opportunity to dust off the folder and review the thesis.  Coincidentally, the team at ASU was beginning their work on the industry around the same time.  Their efforts were quite extensive and the attention to detail shows in the quality of both the report and presentation, which I have received permission to share.  The Bowden Investment Group’s written report and presentation slides, which were presented at Toronto’s Regional Challenge, are available here and here.

Since then, we would make the argument that the macro backdrop has grown increasingly supportive of an investment in Family Dollar.  Inflation expectations have taken a dive lower, dragging gold prices with them, as we discussed in a recent piece titled, On Gold & China.  Looking ahead, we think it makes sense to consider gold’s impact on global markets more carefully, as the volatility in gold may be sending an important message to investors more broadly.  Specifically, we would note that the retailing sector has the highest negative beta to gold. We might also mention that weaker gold prices tend to correspond with a stronger dollar.  Furthermore, many retailers, particularly dollar stores, are making an increasing proportion of their inventory investments abroad.  As a result, they should stand to benefit from an increase in purchasing power driven by a stronger dollar.  A stronger dollar, combined with slowing (or shall we say vanishing) growth in China, may also result in lower oil prices, perhaps the greatest opportunity for US consumers.  A regression analysis from NDR shows that 5% Chinese growth (optimistic in our opinion) is consistent with $45 crude.  Bottom Line: As the punch bowl of liquidity is removed from China’s credit bubble, the bull market in commodities should come to an end, providing a structural tailwind for many retailers.

 Family Jewels