Stitch Fix (SFIX) Has Been Hit Hard for Caution and Honesty: That Makes it A Buy

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Ishould start with a disclaimer. Due to a combination of luck and a sense that stocks were heading for a correction, my wife and I came into this big drop with a significant portion of our investable assets in cash. I have taken my own advice and reinvested much of the money in stages on the way down, but I set aside a percentage for smaller, riskier stocks and have largely held off on that front until the impact of these unprecedented times on that kind of company can be better understood.

I mention that because when I talk about individual stocks at the moment, there is a good chance that I have a position in them in my account, if not at the time of writing, then soon after.

That is the case with Stitch Fix (SFIX).

Should you be unaware, Stitch Fix is an online clothing retailer. They offer personalized styling and clothing shipped to your home for you to keep or return. They are a relatively new company, having started in 2011 and gone public just last year.

Since the IPO a year ago, the stock has, up until this market crash, exhibited a pretty typical pattern. Not long after the offering, it ran up to a high of $52.44 before returning to earth then bouncing around in a range bounded by the $15 offering price at the low and around $30 at the high. It was close to that level in February when the market started to fall, and got hit hard, dropping nearly sixty-three percent to a low of $10.90 in mid-March.

SFIX chart

There were a couple of reason why SFIX fell so far (close to twice the percentage drop in the S&P) and has failed to rebound with the broader market over the last couple of weeks.

The main one is that when they released earnings for their fiscal Q2 on March 9, they gave a much worse than expected outlook for the rest of the year. Over the ensuing week, the stock lost nearly half its value as it dropped to the low. Now in some ways that makes sense; nothing hits a stock harder than a weak guidance number. However, at the height of the coronavirus shock and given the company’s history of conservative guidance (they have beaten earnings estimates in each of the last four quarters), a conservative outlook is neither a surprise nor a particularly bad thing.

SFIX, it seems, is being punished for being one of the first companies to report once the potential for severe economic damage from the coronavirus became clear and for factoring that into their calculations. That isn’t just unfair, it is also crazy.

The other reason for the dramatic reaction was the common belief that as people adjust to current conditions, competition for Stitch Fix will intensify. That may be true, but it ignores the fact that a lot of competitors, including all-powerful Amazon (AMZN), are already trying to compete in the space, and yet Stitch Fix still beat earnings expectations again for the last quarter. More importantly, they reported a seventeen percent year-on-year increase in customers, despite growing competition.

It looks as if the market is undervaluing both the “first to market” advantage that SFIX has and the strong branding and recognition.

Part of the problem for some investors may be that SFIX hasn’t looked much like a “unicorn” since its IPO. They haven’t gone the route so often followed of throwing every available penny at growth and forecasting massive revenue jumps. They have actually reported a profit in every quarter since the IPO and, as previously mentioned, erred on the side of caution when forecasting. Those are both untrendy things to do, but in the current environment they look pretty smart.

In short, the drop in SFIX looks massively overdone, and while it may not exhibit spectacular growth in the near-term, the stock looks like a good long-term investment.

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