This insanely cold weather we've been having here in the Northeast has meant one thing in our household: The fireplace is burning as much as possible. We've been burning a lot of wood; the cord we bought a couple months ago may not make it through the winter. The snow has provided an important reminder of how important it is to keep some dry wood on hand at all times -- a lesson that also applies to investing.
Dry wood, or dry powder, you can call it what you prefer, but it is good to keep some on hand especially in this market environment. The temptation may be to go all in, given the seemingly ever rising market, but how quickly we can forget the pain a bear market can cause.
It's not just about being defensive. While I am perhaps in the minority with the belief that the corporate tax cuts are already priced into the markets, at least until we see the tangible benefits, it is good to have some cash on hand when opportunities arise. They may be few and far between from a value investor's perspective in this market, but occasionally they do still appear.
To that end, last week I initiated a couple of new, albeit small positions, putting a bit of dry powder to work. I was not comfortable with going all in on either of these names, and may add opportunistically to either.
The first is a dog with fleas -- at least that's the way the market has been treating Fossil (FOSL) . While the numbers have not been great and the space is very competitive, I am playing this one as a potential turnaround. Fourth-quarter results will be released in mid-February, and forecasts have already been cut dramatically, from earnings of $1.31 to just $0.37 -- and that's for the company's most profitable quarter, when it typically books the bulk of its annual bottom line.
Although I believe the tax cuts have been baked into the markets, I am not sure they have not been factored into Fossil, which stands to benefit from increased consumer discretionary spending -- that is, if it actually plays out that way: if consumers actually have more to spend, and if they are inclined to spend some of it on fancy watches. That may be a tall order, so you can put definitely FOSL in the category of a dumpster-diving speculation.
FOSL currently trades at just 2.3 times net current asset value, which puts it darn near "double-net" territory. It ended the third quarter with about $167 million, or $3.44 per share in cash. While that is down from $320 million, or $6.60 per share, at the end of the previous quarter, the company paid down $162 million in debt, which is not a bad thing. Debt is still a concern at about $485 million, however.
It is quite hard to believe that FOSL, with its current $400 million market cap, once had a market cap in excess of $8.0 billion. That does not justify a position, but it is stunning, nonetheless. With an enterprise value just north of $700 million and a still well-known brand name, I am also wondering whether a bigger fish ultimately appears to take the company out. It's pure speculation on a dog with fleas.
As for my other recent position, I will reveal it in an upcoming column.
