Stock Sonar #1 - 4/5/2023

Hanes Brands (NYS:HBI) – mrkt cap $1.83B; Price $5.25; trailing P/E na

SPECULATIVE POSITION INITIATED. HBI is one of the largest producers of innerwear. They used debt capital to go on an acquisition spree from 2012-2018 and inorganically increased gross income from ~30% to 38%. This has now caught up with them—the brands they acquired are undernourished and variable interest payments have increased dramatically. FCFE margins are thin (roughly 6% of revenue) and any volatility in cost structure would see them evaporate. Channel stuffing in 2022 hurt them but should be alleviated soon as retailers work through inventory. Despite the uncertainty, we have taken a small tactical position given the upside for this company could be dramatic if management executes on their ‘Full Potential’ plan. If the name sells off violently, we will look to add more.

Medifast (NYS:MED) – mrkt cap $1.08B, Price $99.8, trailing P/E 7.8x

PASS. Medifast is centered around a line of weight loss products all under the Optivia brand. While they fit the health and wellness trend nicely, we do not believe in MLM as a reliable distribution mechanism. In addition, last year had revealed some topline softness. Recent price increases won’t help as this is likely a price elastic product category. The valuation is tempting but we cannot say with conviction cash flows will continue to be healthy.

FUNKO (NAS:FNKO) – mrkt cap $440mm; Price $9.27; trailing P/E NA

PASS. Funko makes pop culture collectibles for adults. Funko generates $1.3B in sales with about 30% gross margins. Although these collectibles are well loved and have a good track record, predicting future consumer demand is difficult as collectors are the main demographic. Additionally, there were operational mishaps and the CEO was replaced by the founder and the CFO stepped down. The difficulty of forecasting demand will keep us on the sidelines.