For the past few weeks we’ve been scouting the markets for possible hidden gems in which to invest. Different sectors have different pros and cons; for example, it seems that the tech sector is now leading the rally with Apple stock reaching new highs every day. Although it’s good to have such tech giants in your investment portfolio, especially with the world turning to technologies more and more every day, it’s important to look for stocks that have a lot of potential but are often unseen by the majority of people.
Another sector which has shown quite the durability during financial and other economic crises, and excluding the pharma sector, which obviously will not die out, is the retail sector and, more precisely, the commercial sector. We’ve already seen how this sector can withstand the cataclysmic 2008 financial crisis, and now during the COVID-19 pandemic, it has remained quite stable. However, there are always two sides of the coin, so it’s really important to choose which companies from the commercial sector to invest. For example, we’ve seen how Amazon stock rose more than 50% for the past few months, but at the same time, Bed,Bath and Beyond will be closing 200 stores due to a 50% sales fall. We have to also remember the Forever 21 filling for bankruptcy awhile back. So what we’ve done is dig a bit deeper into this sector looking for companies that do not have that much exposure in terms of physical locations and, at the same time, are in such niche of this market, which has a lot of growth potential. Our attention was always focused on second-hand clothing since it is a sector with a lot of upside potential, especially in the next few years, so without further ado, let’s dive into the company for today.
For our next investment venture, we’ve chosen The RealReal Inc. (Ticker: REAL). It is a company that specializes in reselling pre-owned luxury items. Although, it might not be the best choice among second-hand clothing resellers, it’s the only choice that is officially listed and traded on the NASDAQ stock exchange. Again it’s easy to find and invest in this company as it is traded through Revolut. So let’s see the pros and cons of the company and how it can turn in to a profitable investment, but first, we should quickly overview the sector of second-hand clothing itself.
Second-hand clothing retail sector:
- With societies advocating for a greener approach in terms of fashion due to the high wastage connected with this sphere and the irreversible damage from an ecological point of view, more and more people turn their heads to second-hand clothing as a way to fight this issue. Fast fashion is quickly getting into the scope of ecology activists, and the industry is being reprimanded for their practices. According to data from 2019, the industry is responsible for 10% of the world’s carbon emissions and the world’s second largest consumer of the world’s water supply. All of those factors will eventually affect the industry and potentially open the road for the second-hand retail sector as a major source for commercial shopping, especially in a society that thrives for a cleaner world.
- Obviously, the price of second-hand items is a big plus that adds a lot of value to this sector. The lower prices could have a higher incentive for people, and since we live in consumer-oriented societies, the price could have a significant effect on decision making. Not only that but especially in times of crisis, the overall consumer spending lowers significantly as people shrink their expenses as much as possible. The current situation after the COVID-19 pandemic is setting up the stage for second-hand retail sales to push even harder. With the uncertainty from an economic perspective, lowering costs per family and the high unemployment rate would further benefit the second-hand retail sector.
- The second-hand apparel market in the US was worth $28 billion in 2019, and most economists predict that it could escalate to $64 billion in the next 5 years. This would be a huge jump in consumer spending in that sector, meaning that companies that have already set their roots and acquired market share would benefit from this inflow of cash. This is a strong indication of the potential found in this sector.
Now, after we’ve outlined the potential that the second-hand apparel sector holds, its’ time to focus on our pick — The RealReal Inc. and evaluate the pros and cons.
- According to data from simplywall.st, the company revenue forecast is expected to grow by 23.43% per year. Over the past year, the revenue grew by 36.8%. The expected revenue growth compared to the overall industry and the market is way higher, with the industry expected growth of 16.6% and the overall market at 9.3%.
- The company liabilities are exceeded both in the short and long term by its assets, and most importantly the company is debt-free at this point which gives more potential to grow and allocate inflow.
- For now, the company is focused mainly on luxury goods, which could be both considered a con and a pro. Of course, the luxury apparel market share is a lot smaller compared to the overall market, but it’s a niche that has been around for quite awhile, and the demand is not lowering. This puts the company in a unique position since most of the other companies in the second-hand apparel sector are not focused so significantly on luxury items. At the same time, the company could easily switch its’ model and start selling also non-luxury items.
- Business is focused on e-commerce mostly, so costs associated with retail stores are brought to the bare minimum. Not to mention that more and more of the shopping nowadays is done entirely online, and this number is expected to grow further in the upcoming years.
- The stock price is currently 21.1% undervalued according to the fair value estimate based on the future revenue flow. After the IPO, the company went public with a price of $20 per share and is now being traded at $15.10.
- So far for the past year, the company has beaten the EPS expectations in each quarter, and the revenue has been rising steadily.
- Currently, the company is operating on a loss, which is a bad sign at this point, but with the possibility hidden in this market, this figure could easily turn in to positive in the next few years which would have a huge impact on the share price
- There were a lot of scandals regarding the company’s way of evaluating the authenticity of the goods they are selling. Although they claim that they put a lot of effort into this process, there have been cases where fake goods were sold through the company, which affects their image, especially considering that they are in the business of luxury items. However, the company is constantly working on improving this process, and its’ quite normal to have slip-ups like that every now and then, especially when you are doing business with second-hand apparel.
As you can see, there are many pros in investing in this company; however, the cons should not be neglected. We believe that it is a bit riskier approach, so we wouldn’t make this company a big portion of our overall portfolio, but at the same time, we believe there is a lot of potential in the following years for the overall sector and this company especially if the management takes the appropriate steps to move the company to the next level, i.e. focusing their resources in extinguishing the cons.
In order to finish our article we’d like to make a quick overview of the technical chart and see some potential targets for those of you that would like to invest, but not in such a long run.
As we can see on the Weekly timeframe, the share price has already begun the upswing all the way back in April when it hit bottom at around $5.20 per share. This is a good indication as it shows the potential of the sector and such companies even throughout the crisis and economic downturns. Recently the price went above a previous resistance zone, which has now turned into a support area, and as we can see, the price is moving steadily within the boundaries of the uptrend channel. The highest point for the share price was around $29.60, which is close to double from the current levels. However, we believe that the potential ahead is way more, and a new high point could be set in the next 2–3 years.
Still, if you don’t want to invest for such a long period of time and lock your funds in that company, the next possible short-term target is at around $21.65, where the price will most likely meet some resistance. This is the point where a previous upswing correctional wave finished before the downturn continued. We expect this target to be reached within the next 6 months to 1 year, of course, depending on the earnings announcement at the beginning of next month and the overall performance of the company throughout the year. We should keep in mind that the COVID-19 pandemic would affect on the year to year sales and revenue; however, it should not affect that much the share price, and we expect it to continue in the same uptrend fashion until the rest of the year. Reaching the first short term target would accumulate a profit of about 40% if you position yourself on the current prices. We think that this is a pretty good possible ROI for a short term period.
That’s’ it from us for this week. If you have missed our analysis on Cheniere Energy Inc. you can check it here — there is still a lot more room until the price reaches our expected value target. In the meantime, don’t forget to do your own research on whatever stocks you’d like to invest in. Our team wishes you happy sailing in the world of investments and of course — Stay safe!
⛔ Risk Warning: Investing in financial assets involves risk and is not suitable for all investors; do not risk more money than you can afford to lose. Please make your own research to make sure the product is right for you.