Motley Fool: A buying opportunity in Hanesbrands
Just about every consumer has purchased something from Hanesbrands (NYSE: HBI), with its well-established brands that include Hanes, Champion, Maidenform, DIM, Bali, Playtex, Bonds, JMS/Just My Size, Nur Die/Nur Der, L’eggs, Lovable, Wonderbra, Berlei and Gear for Sports. The stock has sunk more than 20 percent over the past year, presenting a buying opportunity.
Hanesbrands is feeling the effects of the weak retail environment that persists despite an otherwise improving economy. A lot of business has moved online, and Hanesbrands’ own e-commerce business now accounts for 11 percent of total sales, up from 8 percent a year ago. The company has also recently exited from its catalog business as it focuses on its most promising operations.
Hanesbrands’ competitive advantages include strong brands, great presence in retail outlets, economies of scale, and a large-scale supply chain that’s hard for competitors to duplicate. With 52 facilities across the globe, it can produce its goods at a lower cost.
Another plus for Hanesbrands investors is its dividend, which recently yielded 3 percent. The payout has been growing briskly, rising by 36 percent early this year, and tripling since Hanesbrands established the dividend in 2013.
Spun off from Sara Lee in 2006, Hanesbrands has been growing in part by acquisitions. It has been working on growing its already significant market share, and its future looks promising.
The Motley Fool
Q: What is a “business model”? – R.P., Portland, Oregon
A: A business model is the way a company makes its money. Razor and ink-jet printer companies, for example, sell their razors and printers relatively inexpensively and then make money on higher-profit-margin blades and ink cartridges.
Ethan Allen and Ikea both sell furniture, but while Ethan Allen sells ready-made pieces, Ikea sells pieces you need to assemble yourself. It’s able to charge less for them in part because they’re unassembled and packed in flat boxes.
Mary Kay and Avon employ sales reps selling directly to customers (and recruiting some to sell), instead of sticking with more traditional retail outlets. While Amazon.com’s online business requires warehouses and deliveries, eBay’s model is different and less costly, facilitating transactions between buyers and sellers.
When evaluating a company, assess how attractive and profitable its business model is and what its risks and advantages are.
Q: If I had invested $1 in the stock market after the crash of 1929, how much would it be worth today? – A.V., Venice, Florida
A: The Dow Jones Industrial Average (“the Dow”) peaked in early September 1929 at 381. The crash of 1929 took place over many months and continued beyond 1929, with the Dow initially plunging in October, falling by 12.8 percent on Oct. 28 and then another 12 percent on Oct. 29, when it closed at 230. It rallied to 294 in 1930 and later began a long descent, falling to 41 in July 1932.
With the Dow recently around 20,600, it’s up some 500-fold since the low of 41. That’s enough to turn your $1 into $500. Not too shabby, eh? That’s an annual average growth rate of roughly 7.6 percent.
My Dumbest Investment
It sounded good at the time, as it had “rare” in its name – so I invested in companies specializing in rare earth minerals. Well, the bottom fell out when the Chinese flooded the market, and the companies I’d invested in became penny stocks or went bankrupt. On the bright side, I only lost about $250. But I retain the shares, as it costs $10 to sell. – B.M., online
The Fool responds: Rare earth minerals received a lot of media attention some years ago, in part due to their critical role in many high-tech products, such as cellphones and electric cars. Prices surged as investors got interested and bought shares.
The Chinese companies that produced most of the world’s rare earth minerals boosted production to take advantage of high prices for the minerals, and other companies around the world tried to enter the business. Then the economic laws of supply and demand took over, with an oversupply in the market driving prices down.
Companies such as the ones you invested in still had very high production costs, but were getting very little for their product.
Thus, many went out of business. Some surviving companies have changed their names, in part to avoid negative associations. For example, Avalon Rare Metals became Avalon Advanced Materials.
Commodity stocks can be extra-risky, depending heavily on supply, while high production costs can leave less room for price flexibility.