A Small-Cap Stock For The Great Outdoors (With Some Serious Momentum…)

Have you seen advertisements for the smokeless fire pit? I couldn’t escape them. So, to get rid of the advertisements, I bought one. A Solo Stove.

Little did I know that the company behind this fire pit was publicly traded. Although it’s new to the public space, debuting in October 2021.

The parent company is Solo Brands (NYSE: DTC). And it’s much more than just a fire pit.

Based out of Texas, Solo Brands has four brands under its umbrella. Solo Stove, Oru Kayak, Isle (which makes standup paddle boards), and Chubbies, an apparel company best known for its vibrant men’s swim trunks.

Source: Solo Brands

Since its IPO in 2021, it’s been a tough go for Solo Brands shareholders. But that’s turning around — the stock has picked up some serious momentum.

Solo IPO’d at around $17 per share for a valuation of $2.1 billion. Today, it is valued at just under $800 million and trades around $8 per share. That’s a 60%-plus haircut. From its highs to its lows, shares lost more than 80%. Ouch.

The Financials

It’s not a surprise that shares fell flat on their face post IPO. It went public during a time when investors and analysts paid big multiples for future sales. These companies even got the nickname “Unicorns.”

When the company went public, investors paid $16 for every $1 in sales. Solo’s 2020 sales were $133 million. Today, investors are paying just $1 for every $1 in sales. And sales are growing. In 2021, it did $403 million in revenue; last year it did $517 million in revenue. Analysts estimate the company will pull in $539 million this year.

Revenue is one thing. But it doesn’t matter how much revenue you bring in if it all goes right out the door in expenses. Fortunately, that’s not the case for Solo Brands. Last year, it had $31 million in operating profit. It did lose $4.9 million in net income, but that loss was due to a $30.5 million impairment charge. Once you back out that impairment charge, they are profitable.

An impairment charge is when a company admits it overpaid for something (usually another business) and writes off the goodwill of that company. In Solo Brands’ case, they went on an acquisition spree before its IPO, buying Chubbies, Oru Kayak, and Isle. It turns out they paid too much for those brands, so they are writing them off.

Impairment charges, amortization, and depreciation are some of the main reasons why we don’t use net income as our key financial metric for the Maximum Profit system. These are non-cash charges.

We look at cash from operations to see the real health of a company’s operations. And in 2022, Solo Brands had cash flow of $32.4 million. That’s a massive increase over the loss it posted in 2021. Even better, estimates call for over $105 million in cash flow this year.

So, business is looking good for Solo Brands.

Another thing to note is that Solo Brands is a Direct-to-Consumer brand (hence the ticker symbol “DTC”), meaning margins are better than a traditional retailer. For example, gross margins and operating margins are roughly 58% and 15%, respectively. Compare that to a retailer like Wal-Mart, with thousands of storefronts, whose gross and operating margins are 24% and 4%, respectively.

Action To Take

A slowdown in the economy and, more specifically, a slowdown in consumer spending on non-essential goods like kayaks, fire pits, and standup paddle boards could dramatically impact sales and profits. But the company has posted an impressive turnaround, and the stock is on a tear.

Given the concerns about the overall economy, I’m not so sure about this being a long-term hold. But it makes for a great short-to-medium term trade candidate.

If you do decide to buy DTC, remember that we are dealing with a volatile small-cap stock here. So think about how much risk you’re willing to take. I recommend using a 15% trailing stop loss and a target for when you’d like to pull some profit off of the table.

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