• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Consumer Discretionary

A Peter-Lynch-Style Small-Cap

Over the next five years the company will generate more cash flow than its current market cap.
By SHAM GAD May 16, 2012 | 03:30 PM EDT
Stocks quotes in this article: SMRT

Peter Lynch, one of the greatest money managers of all time, recounts some of his best investment ideas in his classic book "Beating the Street."

He tells a story of how on business trips, he would stay at the La Quinta Inn. He was so impressed with quality of the rooms for the price he paid that he ultimately invested in the company. He tells a story of how his wife came to tell him about the popular Hane's pantyhose that were sold in the egg shells at retail and grocery checkout line. He checked out Hane's, liked it and invested in it. He did the same thing with Taco Bell and Pep Boys (PBY). All of those investments turned into huge winners.

The commonality among these Lynch multi-baggers? First, Lynch did his own scuttlebutt analysis. He saw what each business had to offer and liked it. Second, these businesses were, at the time, smaller businesses with healthy balance sheets and great growth potential. In the words of Lynch, "(b)ig companies don't have big stock moves ... you'll get your biggest moves in smaller companies."

Department store Stein Mart (SMRT) today looks like a perfect Peter Lynch small-cap play that offers various ways to reward patient investors. The company has a market cap of $270 million, no debt and more than $90 million in cash. Based on the current $6.35 share price, the cash comes out to more than $2 a share in cash. On top of an excellent balance sheet, SMRT is a cash cow. Over the past three years, free cash flow has totaled nearly $140 million. While the company has no regular dividend policy, it paid it more than $20 million via a special dividend in 2010, or $0.50 a share in 2010. With so much cash on the balance sheet, I wouldn't count out future special payouts.

I paid a visit to a Stein Mart recently to pick up some socks and I came out with not only socks, but very impressed with what I saw. This wasn't my first time in Stein Mart, of course, but it was my first time really opening my eyes and looking at what the company is all about. I found a pair of pajama pants for $10 that I would cost $40 at Bloomingdale's,dress shirts for $40 that would cost $100 at Nordstrom and other brand names that I was surprised to find.

This merchandising is no accident. Over the past few years, SMRT had added over 150 designer brands and those brands now count for 61% of sales ves. 33% of sales in 2009. These brands include names like Vineyard Vines, Michael Kors, Elie Tahari, and Tommy Bahama. In adding to upscaling the merchandise, SMRT is remodeling stores and expanding its e-commerce sales channel. The company's 264 stores are located in strong, powerful shopping centers close to upscale residential areas. The company has reduced costs by more than $100 million in the past three years.

Stein Mart is a department store offering better prices. I surmise that over the next five years the company will generate more cash flow than its current market cap today. One of the best ways to value a business is to ascertain its value to a private buyer. The current market value is significantly below that private value. When you strip out the cash, the current value of SMRT is $180 million for a business that will probably return that cash to you in 3-4 years time via free cash flow.

The company reports its earnings tomorrow. I would look at any news that sends shares lower as a golden opportunity to buy shares.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, the author had no positinos in any of the securities mentioned.

TAGS: Investing | U.S. Equity | Consumer Discretionary

More from Consumer Discretionary

Penn National: Should Investors Put Their Chips Down?

Bruce Kamich
Jun 28, 2022 12:13 PM EDT

Let's check out the charts and indicators on this operator of casinos and racetracks.

I'm Warming Up to Carnival, but Not Ready to Climb Aboard Yet

Jonathan Heller
Jun 27, 2022 10:00 AM EDT

The stock price of a cruise line operator is becoming more reasonable, but its heavy debt load remains a huge concern.

There's No Clear Sailing Ahead for Carnival: Here's How to Play It

Stephen Guilfoyle
Jun 24, 2022 11:32 AM EDT

CCL did lose a lot of money, much more than anticipated, but there are positives.

Bearish Bets: 3 Well-Known Stocks You Should Consider Shorting This Week

Bob Lang
Jun 19, 2022 10:30 AM EDT

These recently downgraded names are displaying both quantitative and technical deterioration.

Beyond Meat Gives Investors Something to Chew On

Bruce Kamich
Jun 15, 2022 1:50 PM EDT

This veggie name is rallying sharply after a summer promotion announcement, but here's my beef with the charts.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 12:01 PM EDT PAUL PRICE

    A Recent Director Buy in Children's Place (PLCE)

    Four of the most recent insider trades in Children...
  • 07:34 AM EDT PAUL PRICE

    A $525,000 Vote of Confidence on Macerich (MAC)

  • 09:49 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    Stop Wishing, Hoping, and Praying and Take Control...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login