Gap

And it won't matter now
Whatever happens will be
Though the air speaks of all we'll ever be
It won't trouble me
--Toad the Wet Sprocket

Little interests me on the long side currently beyond the metals. However, one old friend that's popping up on my radar is Gap (GPS). I have owned this name several times over the years when 1) I'm bullish on general economic direction, 2) the balance sheet is cash rich, 3) valuation is attractive. When those conditions are in place I find GPS one of the most attractive operators in the retail space. Excellent brands, nice market segmentation in fashion retail, solid free cash flow generation.

Unfortunately, the three conditions noted above are not solidly in place--particularly the first one. However, I must admit that in an overvalued world, the relative value of GPS appears interesting. Alongside other fashion retailers, shares have been sold hard as investors worry about product mix, same store sales, and other usual suspects. Negative sentiment is an attractive feature as it typically creates value. Indeed, from a valuation standpoint, current enterprise value of about $11 billion seems inline with annual FCF generation of $1 billion or so over the past few years.

Although the company has been adding debt to its balance sheet like all other operators in a ZIRP world, it still holds about the same amount of cash as it does debt. In the past, management has shown proclivity for paying down debt. It has the cash to do so once again.

Technically, the stock appears oversold on both short and long term time frames. Recent selling has the stock currently perched on a 50% retracement of the 5 year price range. Monthly stochastics are crossing low.

Am not a buyer currently. But if this issue gets more washed out--particularly down to the 62% retracement level at $22ish where it has some support, my position might change.

no positions