Magic Formula - Letter to subscribers - 23/03/2025
Q1 2025
Disclaimer: This article is for informational and educational purposes only. Do not interpret anything below as financial advice. Always do your own research & speak to a financial professional before making investment decisions.
Dear Subscriber,
Thanks for checking in again.
Results benchmarked against SPY, as of 23/03/2025:
Investments: 2
Since first purchase: 4.56% vs. 7.96%
YTD: -4.81% vs. -7.65%
It’s been an interesting period for transactions. Despite a symbolic vow to avoid selling any positions during the calendar year, we exited three holdings in the first quarter of 2025: Williams-Sonoma (WSM), Buckle (BKE), and Warrior Met Coal (HCC), leaving us with two remaining positions: Crocs (CROX) and Ituran Location and Control (ITRN).
Let me explain.
Ultimately, investors buy for the same reason: to make money. Investors sell for various reasons, a few of which I’ll outline below.
Profit-taking – The stock has appreciated significantly, and the investor wants to lock in gains.
Deteriorating fundamentals – The company's financials, competitive position, or industry outlook have worsened.
Better opportunities – The investor finds a more attractive investment with higher potential returns.
Portfolio rebalancing – Selling is necessary to maintain desired asset allocation or reduce risk.
Tax considerations – Realising gains or losses for tax planning, such as offsetting other capital gains.
Sell Decision #1 - Williams-Sonoma (WSM)
I bought shares of Williams-Sonoma in May 2022 at around $100. After the company announced a two-for-one stock split in June 2024, I sold on March 10, 2025, for $184.48 post-split ($368.96 pre-split).
The sale resulted in a 58.75% annual return, with 3.56% from dividends, marking my best investment to date with a 3.5x return in under two years.
Williams-Sonoma had an exceptional performance during my hold period, and I decided to lock in gains, not due to concerns about its financials or future outlook, but because of the attractive opportunity set in other equities.
Sell Decision #2 - Buckle (BKE)
Buckle was one of my first investments for the Magic Formula experiment in February 2022. My thesis was simple: a debt-free U.S. fashion retailer known for premium denim jeans, offering a 12% FCF/EV yield and a strong history of paying out free cash flow to shareholders via regular and special dividends. As a family business with significant insider ownership, Buckle, founded in 1948 by David Hirschfeld and expanded by his son, Daniel J. Hirschfeld, seemed like a solid investment.
Selling Buckle was tough but necessary. The stock delivered a 19.68% annual return, with 11.12% from dividends. As my initial thesis was met, I decided to take some profits.
However, the company’s financials have deteriorated, with revenues falling from ~$1.3B in 2023 to ~$1.2B, and comparable store sales declining 8% in 2023 and a further 2.7% in 2024. This raised concerns about its ability to sustain the dividend.
Additionally, with aging leaders like Daniel Hirschfeld (83) and Dennis Nelson (74), I grew concerned about succession planning and the potential for new management to change the dividend policy.
Sell Decision #3 - Warrior Met Coal (HCC)
After investing in Warrior Met Coal in November 2022 at $33.55, the stock has been volatile, peaking above $70 in late 2024 before recently dropping below $50. As of writing, the stock is down about 20% over the last year, with a sector-wide decline affecting other coal companies like Alpha Metallurgical Resources (AMR), which is down almost 60%.
I sold my shares in March for $44.98, realising a 6.89% annual return, with 2.11% from dividends. This was disappointing, especially since in December, the total return was much higher, around 25% p.a. Reflecting on this, it’s difficult to pinpoint a specific reason for selling.
I initially invested in Warrior Met Coal because it’s a leading player in the met coal space, a key commodity for steel production, and a low-cost U.S. producer. Warrior’s Blue Creek project, coming online in the next year, is expected to boost production significantly. While this remains true, the recent selloff appears driven by declining coal prices, a supply surplus, and a short-term dip in overseas demand, particularly from China’s steel industry.
Coal is cyclical, and it feels like we’re in a downcycle. While I believe companies like Warrior Met Coal and Alpha Metallurgical Resources are well-positioned for long-term growth due to their solid financials, strong management teams, and attractive capital allocation policies (such as Alpha's buybacks and Warrior's special dividends), I prefer to focus on less cyclical industries. Additionally, my investment in Warrior Met Coal was not large enough to significantly impact my financial position, even in a best-case scenario. The same applies to Williams-Sonoma and Buckle. Despite various reasons for selling these positions, the core theme remains: asset allocation. With a modest capital pool and a long runway ahead, I am focusing on my best ideas and maximising the potential for outsized returns from a few big bets.
Looking Ahead To 2026
There are 20 months left until this experiment reaches the five-year mark. To maximise portfolio returns between now and then, I’ve decided to go all in on two high-conviction ideas. As of today, Crocs makes up 56% of my portfolio, with the remaining 44% allocated to Ituran Location and Control.
I previously touched on Ituran in an earlier post and plan to share more in-depth thoughts on the company later this year. For now, I want to focus on my investment in Crocs, which I see as an exceptional value opportunity at its current price of $104.
Crocs delivered record financial results in 2024, driven by strong growth in its core brand, improved margins, and disciplined financial management. While HEYDUDE struggled, Crocs remains focused on shareholder value through buybacks, debt reduction, and sustaining profitability.
Financial Performance
Record Revenue: $4.1 billion in 2024, up 4% from 2023.
Earnings Per Share (EPS):
Diluted EPS: $15.88 (+24% YoY).
Adjusted Diluted EPS: $13.17 (+9% YoY).
Gross Margin: Improved to 57.9% in Q4 2024 (vs. 55.3% in Q4 2023).
Operating Cash Flow: ~$990M, enabling:
$550M+ in share repurchases.
$320M in debt reduction.
Crocs Brand
Revenue grew 8.8% to $3.278 billion.
Direct-to-Consumer (DTC) sales: Up 9.9%.
Wholesale revenue: Up 7.6%.
International revenue: Grew 17% to $1.445 billion.
HEYDUDE
Revenue declined 13.2% to $824M.
Wholesale sales down 19.5%.
DTC revenue down 3.9%.
Shareholder Returns
Debt reduced: From $1.664B → $1.349B.
Cash reserves: Increased to $180M.
Share repurchase program: Increased by $1B, total now $1.3B.
2025 Outlook
Revenue Growth:
Mid-single-digit growth expected for Crocs brand.
HEYDUDE performance under review.
Profitability
Target ~24% operating margin for 2025 and beyond.
Valuation
I ran a reverse DCF model to gauge the value of the stock at today’s price. Applying a demanding hurdle rate of 26% and an exit multiple of 12x the company would only need to grow revenues at 1% to justify today’s $104 price tag. For those out there who believe 12x is a rich multiple for a company like Crocs, even with a 10x multiple the company would only need to grow revenues in the 3%-4% range with the same hurdle rate to justify the price offered by Mr. Market.
In other words, for investors who believe that Crocs is able to deliver on growth expectations and expand in unsaturated markets beyond the US, the company’s valuation looks like attractive. I will continue to scoop up shares if the price remains depressed at these levels with new capital that enters the portfolio.
I hope that you’ve found this write up useful. I look forward to connecting again at the end of Q2 for another review.
Regards,
QC
Long time did not see you on Discord!?