Stock Sonar #21 - 8/23/2023

Cato Corp (NYSE:CATO) — mrkt cap $157mm; Price $7.75; trailing P/E NA

STARTER POSITION INITIATED. It is becoming clearer to us that the U.S. specialty retail sector is turning into a disaster zone, hence our recent focus here. The market seems to have very little idea about which companies will emerge with their health intact and which ones will fade away. Some businesses that maintain loyal followings and consistently impress customers make our prognostications easier. However, others, like Cato, which appears to make minimal adjustments to its strategy, pose a greater challenge. Cato operates in around 1270 strip-mall locations and specializes in selling fashionable, value-oriented clothing for plus-sized women. There appears to be adequate shareholder alignment and the valuation is at rock bottom. It is currently trading close to its cash value and well below its liquidation value. Our belief is that Cato will find ways to eke out a profit in the short term, and there exists a reasonable probability that it will regain its health in the long term. Although Cato will likely never be a core position for us due to our lack of conviction in the company’s ability to strengthen, its valuation is low enough to justify a small position in our portfolio.

Badger Infrastructure (TSX:BDGI) — mrkt cap $1.16B; Price $33.79; trailing P/E 38

PASS. Badger Infrastructure is the only vertically integrated hydrovac service provider in North America. Hydrovac trucks are used when maintenance work on an existing infrastructure is needed and care needs to be taken to not damage pipes or cabling. Hydrovacs are more efficient and less damaging than alternatives such as excavation equipment or human labor. Due to the delicate nature of the job, BDGI doesn’t compete on price, and instead the determining factor are safety and reliability.  Although there are significant tailwinds from the infrastructure bill such as the replacement of lead pipes and broadband installation, BDGI is trading at almost 40x plus earnings and heading into a heavy capex cycle. We will look for a drawback to initiate a position.

Crocs, Inc (NAS:CROX) — mrkt cap $6.07B; Price $98.47; trailing P/E 9.2

PASS. Crocs popularity has experienced a significant surge in recent years, attributed to their innovative products and a skilled marketing team. There do appear to be underlying structural reasons driving Crocs popularity, particularly in how their products empower greater self-expression. They trade at around 11x , and they seem to be actively working on expanding their product range through acquisitions. In the past management has made misteps—allowing too much variety that no longer had the Crocs look and feel. Management’s answer to diversifying products without straining the spectrum of their Crocs line is to find acquisition candidates – their very large acquisition of HeyDudes for 2.5B in 2021 speaks to this. We have a strong bias against managmenet teams that have an acquisition strategy in place for the sake of diversifying. The core Crocs brand just may be strong enough to carry this company through to ever-higher multiples but we will stay on the sidelines for now.

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