Link: Why We're Buying BBBY and SBUX
NEW YORK ( TheStreet) -- Lindsey Bell interviews Stephanie Link regarding newly initiated positions in Bed, Bath & Beyond and Starbucks. A full transcript appears below.
Stephanie, this week you added a few new positions, one of which was Bed Bath & Beyond. Of course a housing play there, but you've already got a few housing plays with some of the banks, Weyerhaeuser, Home Depot. Why add this one?
Yeah. I know. This is a common theme for us, certainly. I would just say this -- that with Bed Bath & Beyond the risk/reward is very favorable at this level. Its stock got hit nine percent last week after the company reported earnings that were disappointing. Even though they kind of met expectations, margins were below plan. I think people are nervous that their acquisitions are starting to eat into their very high margin structure. I think it's kind of a temporary thing. I think you'll see margins still being under pressure until the end of the year. But I think as you get into next year you have synergies, integration, and I think you've got market share gains as well.
Was the couponing a concern? It helped drive traffic, I think, for them.
This is something that they do. They do couponing. I think more of the concern was the Cost Plus acquisition. That I think this is the bigger issues in investors' minds. Did they make the right deal? Did they overpay? Are they able to integrate? This is a company that does a very good job at making acquisitions. Then you step back and you say they've had a fabulous balance sheet too. No debt, a billion in cash, they're going to generate about four billion dollars in free cash over the next three years. They will be able to fund their growth, make acquisitions, and continue to grow. That's why I think at this valuation with it down so much the risk/reward is very favorable. Lindsey Bell:
Where are you buying and what's your target? Stephanie Link:
Well, at this point our levels are right around where it is. We could get 15 to 20 percent over the next year. But it's going to take time. We've got to get through the next two or three quarters of margins, we need stability. I think that you will continue to see strong comps, double digit earnings, double digit revenues, and I like that combination. Lindsey Bell:
Starbucks is another one that you're adding too. It's another out-of-favor name. What are you seeing that other people aren't? Stephanie Link:
There's a common theme here, right. We definitely like stocks that are not in favor. This is one too. It's had a nice rally of about 10 points from its low but it's still down 17 percent from its April high. A lot of it was because comps disappointed over the summer when they reported. A lot of that was weather related. I hate to blame it on weather but it really was a very hot summer. I do think that the company's doing a great job in terms of cutting costs. They have a great product pipeline with new products, and with acquisitions. They're doing a lot of good M&A. I think that ultimately down the road those will contribute to double digit earnings and revenue growth. This stock right now is trading at a PEG basis of 1.2 times. It's cheaper than Yum Brands and it's cheaper than McDonald's. We actually sold McDonald's to fund the Starbucks buy. Lindsey Bell:
Okay. This is a small position for you right now. Do you think it becomes a core one? Stephanie Link:
Both of them will. Yes, definitely, over time.
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