01It's a spinoff
When a conglomerate allows one of its brands to become its own free-standing publicly traded company, it's called a spinoff. Often, a conglomerate spin-off brands when it's facing criticism over a stagnant stock price. After all, if the market doesn't fully value its assets, why not spin them off and make gains when the junior company goes public?
Research shows that spun-off companies have outperformed the market over the past few decades. Even the Guggenheim Spin-Off ETF , which tracks its managers' top twenty-five spinoff opportunities, has beaten the S&P by a wide margin over the past 1, 5, or 10-year intervals.
Spinoffs tend to do well for a number of reasons. The spun-off company suddenly has a management team devoted solely to its performance and it doesn't have to share resources with a conglomerate. Spinoffs also usually have clean balance sheets once they go public, as the parent company is invested in its success. Finally, spinoff's e parent company is invested in its success. Finally, spinoff's don't' attract the kind of investor attention that IPO's do, so investors can usually buy the stock at a reasonable price. That was certainly the case for Hanesbrands, the stock spun-off from Sara Lee in 2006 and shares stayed neutral for a few years before taking off. While spinoffs are no guarantee for success, they are a nice trait if everything else "checks off" on a stock. In the case of Hanesbrands, being a spinoff was just one exciting trait.s are no guarantee for success, they are a nice trait if everything else "checks off" on a stock. In the case of Hanesbrands, being a spinoff was just one exciting trait.
Hanesbrands actually fits two other Lynch characteristics that connect on a common theme: it's in a slow-growth business and it's dull. Hanes is boring, it's not a hot new thing, and that can be a great thing for investors for two reasons.
- Regardless of how strong an industry or business is, you'll only make money if your stock price goes up. Therefore, you'd rather buy a stock that had less enthusiastic investors bidding up the price. Unfortunately, hot stocks in hot industries have their prices inflated too quickly; just look at all of the internet IPOs over the past few years. Some of those IPO's might be winners but, as a group, their prices are too rich.
- Businesses that have exploding profits and low barriers to entry, attract loads of competition. That's the most basic rule of capitalism. Take a profitable travel booking website for example; its soaring profits are risky because starting a competing site requires almost no start-up capital. On the other hand, Hanes is not the sort of business that Harvard PhDs' get together to create and, even if they did, its scale and high capital requirements are significant barriers to entry.
In the end, dull and profitable is a great combination. Stocks that meet this criteria tend to be underappreciated by Wall Street because they're low profile, which gives plenty of entry points for investors. By the same token, the "un-sexy" tag doesn't attract many competitors, which adds value as well. The only caveat to this rule is the "boring" business must have a high barrier to entry or some other feature that keeps competitors at bay, because being "un-sexy" will only go so far.
03You have to keep buying it
This is a simple rule. You'd rather own a business that makes products that consumers have to keep buying, like underwear or razorblades. Hanes underwear is a product that the average consumer buys more frequently than, say, a car (at least let's hope so). These habitual buying practices make Hanesbrands earnings a bit more stable; considering the company relies partially on acquisitions for growth, this really matters.
Reasons Peter Lynch Would Love Hanesbrands
Reasons Why Hanesbrands Has Beaten The Market So Far
Truly great investment strategies go beyond the numbers. Sure, a companies performance always counts but screening stocks based solely on metrics never works in the long run. Take Ben Graham's value criteria for example; it was based solely on metrics, and it doesn't work as well today because stocks just aren't as cheap as they were during the depression. That's part of the reason Peter Lynch's approach has aged well. It blends both qualitative and quantitative criteria and always judges stocks relative to their peers.
I recently discussed how Lynch's "buy what you know" strategy can help investors find great retail stocks. In the coming weeks, we'll focus on consumer goods stocks that meet Lynch's criteria for a "perfect stock," outlined in One Up On Wall Street.
First, we'll look at Hanesbrands Inc., a stock that has beaten the S&P by nearly four times over, over the past five years. In part one of this series, we'll look at the three Lynch approved criteria that have made Hanes a success up to this point.