Here's to Piggybacking

 | Apr 29, 2014 | 2:00 PM EDT
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conn

The best thing about investing is that you can piggyback off someone else's idea and not be accused of cheating or stealing. In fact, the opposite is true: Piggybacking off the ideas of others in investing in often considered a very intelligent investment strategy. And, in this current market environment, where stock prices are constantly moving higher, piggybacking can be a very smart way to find opportunities that otherwise would go unnoticed.

One such idea is retailer Conn's (CONN), which was disclosed as a holding by David Einhorn and Greenlight Capital. The retailer sells consumer appliances, electronics, computers and home furnishings. In addition, Conn's also finances its customer purchases and provides credit insurance products. In fact, Conn's finances more than 75% of its customer purchases via a subprime credit portfolio. The word subprime is a not a favored word these days.

In any event, despite reporting strong sales growth last quarter, credit losses increased, which caused Conn's to take a hit on earnings and reduce its earnings-per-share (EPS) forecast. Need I say more? Not only did Conn's guide lower, but the market's nervous aversion to "subprime" credit losses was the cherry on top. The shares declined by more than 50% on the news. After reaching a high of $80 this year, the shares fell to $32. News of the Greenlight investment have boosted the shares up to $45 today, clearly taking away some of the margin of safety.

Yet while all the focus on the Conn's report was on the credit losses, in the fourth-quarter earnings announcement in February, management announced 33% comparable store sales growth and very juicy gross margins. Of course, if those sales are being financed by the company and customers aren't paying, then the profits are being converted to cash. That will be a problem. But let's face it: The credit markets are improving and, while Conn's customers may not be near the high end of the credit score, consumers are getting healthier.

More so, and this is what I believe Einhorn is reacting to, Mr. Market has likely overreacted to the selloff. To be specific, the increased credit losses caused Conn's to reduce its EPS guidance from $3.80-$4.00 to $3.40-$3.70 for calendar-year 2014. Despite that, Conn shares have rebounded from $32 to $45. The company is still down $1 billion, or 40%, from its value prior to the earnings announcement.

In short, great ideas come from market shocks and uncertainty. Greenlight believes it has one in Conn's and hungry investors may want to look at it more closely.

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