NEW YORK ( TheStreet) -- Seth Hamot is the founder and managing partner of Roark, Rearden & Hamot Capital Management. His fund has more than $150 million under management, has performed well through two out of three recessions and returned an annualized 17% to investors net of fees. Today, he shares three investment ideas with us.
Hamot says Aeropostale (ARO - Get Report) is the premier teen retailer. When you compare the company's fundamentals to the other large players, American Eagle Outfitters (AEO) and Abercrombie & Fitch (ANF), you see its superiority. Yet, ARO is relatively cheaper than its competitors.
Let's first look at the ability to drive same-store sales. In 2009, arguably the worst year for retail in the last generation, ARO had year-over-year gains every month. Furthermore, if you consider the gains in total sales compared to the recent trimming of inventory -- that's right, the decline in inventory -- you realize the increasing efficiencies that are driving huge cash flows at ARO.
"Specifically, let's take the summation of the last four quarters of 'percentage yearly revenue gains' and subtract from that number the summation of the last four quarters of 'percentage of yearly inventory gains,' the latest quarter being actually a reduction in inventory. ARO's resulting number is 50.83 and accelerating. AEO's is 21.88 and going in the wrong direction. ANF's is 34.68 and also headed in the wrong direction."Analysts miss all this, though. They are so wed to their bullish calls on ANF and AEO that they have conjured up a story that once the recession ends, all those customers who are moving to a lower price point by shopping at ARO are going to return to the competitors' stores. Hence, ARO trades at 5.43 times its LTM EBITDA, while ANF trades at 7.26 times. AEO traded at 7.14 times until it lost 35% of its value in the last quarter. Caught up in their past view of the world, they are missing one of the great retail stories around today, which continues to improve its business quarter over quarter. Nabi (NABI) is a wonderful story. Nabi has a vaccine that helps people quit smoking. GlaxoSmithKline (GSK - Get Report) actually put up $45 million to partner with it on this drug. No one spends $45 million on a drug that isn't credible. That will probably move forward by the end of 2011. When I entered my position, Hamot says, I wasn't paying more than cash and the NPV of royalties, probably lower and upper 3's. GSK validated the vaccine and the ramifications of its approval are mind-boggling. You take four or five shots over 6-8 months and you can get over smoking. Our nation spends a lot of money on smoking, so there will be a lot of push behind this drug; you could make budgets balance if less people smoked. Even if you doubt it, the GSK guys have been looking at it for months and when they're done with the next phase of development, GSK will pay NABI another $30 million for the work they're doing, and then the numbers get really crazy for royalty payments. When I was buying, I got in at prices where most of the story was for "free" because of where the stock price was trading. BreitBurn Energy Partners (BBEP - Get Report) found it was overleveraged at one point last year and so it cut the dividend distribution, causing the stock to go down to $6. Dividend money went to cut down debt and now it's at $15. We went from $6 to $15. Baupost is there and the interesting thing is that it got involved with a proxy contest with the largest shareholder. Quicksilver (KWK), the largest shareholder, went on the board and removed two guys -- the chairman and CEO, the two folks the company is named after. They became management employees. Quicksilver is overleveraged and owned 21 million shares of BreitBurn at one point, or about 40% of the company. They had a proxy contest and those two top executives were removed. You have to take a step back and wonder what's going on. If there is nothing going on, why would they bother to remove people from the board who may challenge their decisions? There's a possibility that managers were taken off the board of directors so that potential M&A activity could be kept segregated from the operations, which offers a potential exit strategy for Quicksilver. In the meantime, I got a 10% dividend and 37.5 cents per share per quarter, not too bad at all, and mostly tax free.
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