This afternoon we are moving shares of Signet Jewelers (SIG) from BUY to SELL.
Although our initial price target was 29, the company’s fundamentals have improved immensely, and our current price target is 94. With the shares now trading just over 104, our willingness to raise our target again is limited, given the risk/return trade-off, so we are moving the shares to a SELL.
Signet’s turnaround has been one of the most impressive in the market in the past five years, if not the past decade. On September 27, 2019, when we first recommended the shares at 17.47, the company was struggling with a broad range of problems that threatened its existence: a debt-laden balance sheet due to its over-zealous in-house credit program, a tired merchandising and marketing approach, a bloated and unproductive expense structure, a mixed-quality store base, and a culture that was toxic to women.
The arrival of Gina Drosos as CEO showed immediate promise, and under her leadership the company has moved into the vanguard of jewelry merchandising, retailing and e-commerce. Also, its store base has been rejuvenated while its expense structure is now leaner and more effectively aimed at producing enduring revenues. The balance sheet is now considered “fortress-like” and Signet is generating strong free cash flow. It appears that the culture is healthy, creative and highly productive.
If its fundamental strength continues, Signet could see its shares continue to surge. The all-time high of about 150 is not entirely out of range. Momentum investors could drive the stock higher, and with its $5.6 billion market value and strong balance sheet, a private equity company could easily acquire Signet, likely at a high premium. As such, shareholders may want to consider keeping a stub position that could participate in any further price gains.
Yet, we also acknowledge the downside. If results flatten out, or decline, or repeatedly miss ever-rising investor expectations, the shares could tumble. Overall, the risk/return trade-off has moved to unfavorable.
Based on mid-day prices, the Signet investment has produced a 502% profit in about 26 months.