I've got to admit that I am still looking for bargains in the final days of 2020.
The criteria I utilize for my annual Tax Loss Selling Portfolio is not all-encompassing; for one thing, it requires forward price-earnings ratios of less than 15 for the next two years. Now, given the number of companies that don't have forward price-earnings ratios per se because no analysts cover them, there are certainly additional opportunities.
Late last week I identified, and took advantage of (or was taken advantage of -- time will tell) one such opportunity in fashion retailer Cato Corp. (CATO) . Yes, it again once again breaks my rule of moving on after selling out of a name, but it has been more than two years since I last had a position in CATO. At that time, Cato, and many other retailers had been prematurely presumed dead, and there was a lot of money to be made on what turned out to be the kind of market inefficiency that I like to identify.
Today's CATO is down 53% year to date, and has had some rough Covid quarters, especially the first two of this year. The company closed all of its stores starting on March 19, and began reopening on May 1.
The third quarter was a bit better, with revenue down 21% year over year, and a loss of $0.15 per share. However, the company wisely suspended its ample $0.33 quarterly dividend last spring, which has allowed it to keep a significant amount of dry powder on the books. CATO ended last quarter with $151 million, or $6.68 per share in cash, a significant amount given Friday's closing price of $8.20.
The company has no debt; it paid back the $34 million it took from its line of credit early in the pandemic during the second quarter. (Like many other retailers, Cato leases its stores, due to a somewhat recent FASB rule change, those leases now show on the balance sheet as both an asset ($184 million), and a liability ($192 million). CATO currently trades at 0.73x tangible book value.
The company has continued to buy back stock, reducing shares outstanding by about 4.5% since its February 2020 year-end, and 21% over the past seven years. I find the continued buybacks during the pandemic, and the confidence it suggests, refreshing.
With no current analyst coverage, CATO garners little attention. It has not recovered any real ground lost during the pandemic the way many other retailers have, and I was willing to take the risk on the company's potential for improving results, along with a solid balance sheet. But buyer beware.
