Below is an actual recommendation from November
23, 2001. The stock recommended, Winn-Dixie, is up 30% in the five
months since I recommended it. (This update is from May 2002.)
I give these samples free, once a year -- usually
in November. The recommendation is not back-dated; it is a current
recommendation from the portfolio. By posting a current
recommendation, I allow you to follow the recommendation for better,
or for worse, in real time -- knowing that I didn't just pick a past
winner to put here.
I suggest you read the recommendation, digest it
and compare it to the kind of analysis you get from other sources.
Then, decide if it's the kind of guidance you're looking for. If it
is, please consider subscribing to my weekly newsletter.
By the way, my first free sample recommendation
was JC Penney. I recommended it in late November 2000. We sold it 9
months later for a 174% profit.
November 23, 2001
WINN-DIXIE OUR NEXT
In my premier issue of Insiders PLUS, I recommended JCPenney as a
strong turnaround candidate. All the bad news on the company was out
and factored into the stock, but few people were giving credit to
the potential that its new CEO, Allan Questrom, had set out to
unlock. Such is the case with this week's recommendation, Winn-Dixie
Stores (NYSE: WIN). Can we make 174% in 8 months like we did with
JCP? I don't think we'll do quite that well, but a 55% to 75% return
in the next 18 months seems very doable.
WIN, like JCP is a retailer, but WIN sells primarily groceries.
At one time it was the 3rd largest supermarket chain in
America, but slow-thinking, entrenched, family-owned management let
the company slip all the way back to the number 10 slot. The company
was in trouble and had to call in a specialist.
WIN's new CEO, Allen R. Rowland, has a reputation in the grocery
business every bit as illustrious as Questrom's is in department
store retailing. His most
recent stint before coming to Winn in late 1999 was a quick
turnaround at Smith's Food & Drug Centers, a stodgy family-owned
chain in a similar predicament to Winn's. In less than two years,
Rowland turned the company around and found a buyer at a price that
satisfied the family and public shareholders alike. Before his quick
fix at Smith's, Rowland spent 25 years at the extremely well-run
Albertson's. (I'm continually tempted to recommend Albertson's, I
just keep waiting for the right opportunity.) Over there he was
senior VP and had responsibility for all retail operations in
various portions of the United States.
It didn't take long for Rowland to start earning accolades at
Winn. Burt Flickinger, a consultant and food retailing professor at
Cornell University called Rowland's early turnaround plans "…
a brilliant master stroke.'' And Jim Donald, chief executive officer
of Pathmark Stores, said of Rowland, ''He's probably the best
candidate for the job.''
The problems at Winn, like those that plagued JCP, were daunting.
The chain suffered from de-centralized supply chain management, but
stratified ivory-tower executive decisions. Rowland is changing all
that. He's restructured the company so that information and ideas
flow freely up and down the management chain, but ordering is
centralized to increase purchasing power.
Unprofitable departments have been closed, as have a number of
underperforming stores. Major renovations have taken place at many
stores, and highly-qualified new management has been brought in to
take on everything from managing the company's real estate to
training its employees. The list of new managers reads like a who's
who in retail achievement. It was accompanied by a long list of old
managers (some there for 35 to 40 years) taking much-needed
In the last few months, Winn-Dixie Insiders have showed their
faith in the company's progress by buying more than 37,000 shares of
stock. The bulk of it, 20,000 shares, was bought by Rowland himself.
The rest was bought by 5 others, including the CFO, the Chairman of
the Board and a VP. While these buys are not huge amounts of stock,
they are certainly healthy amounts. They are also probably honest
amounts. Many of the tremendous buys we saw a couple of years ago,
turned out to be public-relations buying -- much of it mandated by
the boards of directors. I've found no sign of that here.
By the way, Winn-Dixie is one of only two companies in the
S&P 500 last year that reports the cost of options compensation
in their earnings statement. So, the earnings it reports will be
Not There Yet
While its debt is a bit high, Winn's interest coverage is
comfortably adequate. Moreover, after the huge investment in
renovations in the last few years, capital spending plans have been
greatly reduced for the coming year to about $166 million. In recent
years, that figure has generally been in the $330 million range.
That extra free cash flow should allow the company to pay down debt
relatively quickly, while still leaving enough left over for growth.
Winn-Dixie still has a lot to do to rebuild its image, improve
its service, and re-shape its marketing, but the company is well on
its way. It has cut the dividend to pay down the debt it incurred to
restructure, and it has made all the other tough decisions it needed
to make to get its act in order. Now all it needs is more time. But
if you wait for all the bricks to be in place, you'll miss the best
move in the stock.
WIN shares currently trade at $14. The company is expected to
earn between $1.05 and $1.20 in the coming year. By 2003 I think it
can return to its former $1.40 range. With most of its peers trading
at a P/E of 18, Winn would probably fit right in there, bringing its
price to the $22 to $25 range.
There's one last interesting tidbit about WIN. A few years ago,
when it was in trouble, it was repeatedly mentioned by analysts as a
potential takeover candidate. Its 1,100 stores in 14 states would
make a nice addition to a chain trying to expand in the southeast
where Winn is strongest. There was a big obstacle in the way of a
takeover, however, that is, that the company is 40% family owned.
But the new talk is that with the old generation retiring, the new
generation is much less adamant about keeping independent. So, even
if the stock doesn't perform well enough to reach its 1997 high of
$50, you also have the possibility at any time that a suitor could
bump the stock up 15% to 20% to close a deal. That wild card makes
an investment in Winn-Dixie extra enticing. Buy Winn-Dixie Stores
up to $15.
Reasons to Buy Winn-Dixie Stores:
- New management team is accomplished in all phases of
- Stock sells at more than a 50% discount to its peer group -- a
discrepancy which should disappear in a year or two.
- Removal of old management paves way for needed reforms -- and