Investors Need to Think Very Carefully Before Buying the Hanesbrands (HBI) Rumor

Hardly an exciting enterprise, consumer goods producer Hanesbrands (HBI) nevertheless became one of the most-discussed publicly traded securities, with HBI stock bouncing sharply higher during the midweek session. Unconfirmed chatter suggests that an activist investor may be targeting Hanesbrands to spark positive momentum in the business.

On paper, the idea of activist investing can be cathartic and emotionally satisfying. In some ways, it’s like being friends with the biggest, toughest streetfighter in a bar before a brawl breaks out. Just with your buddy’s menacing stare, it’s possible for an angry mob to step down and rethink its priorities. However, that’s more fiction than reality.

In truth, even if the Hanesbrands rumor turns out to be true, HBI stock might not holistically benefit from the development.

Options Traders Go Heavy on HBI Stock

Still, the possibility of a major turnaround didn’t stop derivatives traders from speculating on HBI stock. During the late hours of the July 26 session (per Barchart’s screener for unusual stock options volume), total volume for HBI options reached 27,918 contracts against an open interest reading of 181,884. Further, the delta between the Wednesday session volume and the trailing one-month average metric came out to 623.26%.

Drilling down, call volume hit 27,308 contracts against put volume of 610 contracts. This pairing yielded a put/call volume ratio of 0.02. Notably, the put/call open interest ratio sits at 0.30, which also carries bullish implications.

Interestingly, options flow data indicates significant activity in HBI stock since the beginning of July, with volume for bullish tactics amounting to 23,961 contracts against volume for bearish tactics hitting 24,282 contracts.

Also, it’s worth pointing out that in the trailing month, HBI stock printed a return of over 16%. Arguably most of this upswing stems from fundamental speculation that the business will eventually improve. Back in May, Barchart content partner The Motley Fool acknowledge the tough year that the apparel manufacturer incurred.

Broadly, retailers are reducing inventories, leading to lower order volume. Even worse for Hanesbrands, the company itself carries excess merchandise on its books. With sales continuing to fall and cash held up in rising inventory, management issued the painful decision to eliminate its dividend.

Nevertheless, even with the company’s first-quarter results showing more of the same – slumping sales and tumbling profits – some positives emerged. Specifically, TMF noted a reduction in inventory and the generation of free cash flow.

Of course, the bad news tends to cloud HBI stock. However, TMF argues that the pessimism is already priced in. If so, one could make the case that Hanesbrands is undervalued. Conspicuously, HBI trades at a revenue multiple of 0.27, which is dirt cheap – assuming of course that the company rebounds.

If it doesn’t, it could be a value trap and that’s where my hesitation regarding the activist investor rumor lies.

An Activist Can’t Promise Change for Hanesbrands

While the apparel maker may be cheap as a multiple to revenue, it’s not exactly a discount against many other metrics. For example, HBI stock trades at a forward earnings multiple of 14.64. However, the average forward price-earnings ratio for the apparel industry sits at 10.50X. So, even with the trailing one-year loss of 50.56% (that’s a lot of bad news baked in), Hanesbrands is overvalued against projected earnings.

That’s not a great backdrop to jump into. Put another way, if the activist investor rumor is true, said entity would have an enormous challenge on its hands. By no means should retail market participants assume that HBI can just keep trucking forward on expertly crafted rhetoric. Hanesbrands suffers from significant challenges, much of which impacts the broader consumer economy.

More critically, activist investors don’t have the greatest success ratios. For example, Harvard Law School posted a study regarding the effectiveness of this particular brand of advocacy. Consider the following statistics:

• In 2017, there were 484 activist investor campaigns.
• These initiatives involved 428 companies.
• Within the total effort, 101 resulted in successful campaigns (meaning activists accomplished their stated goals).
• Finally, 63 campaigns were settled.

Put another way, only 34% of activist campaigns yielded successful results. Notably, 34% of campaigns were either unsuccessful or withdrawn by the activists. The other 32% of campaigns were announced but either did not gain traction or were ongoing.

Taken as a whole, the rumors about an activist investor shaking things up at Hanesbrands is an enticing prospect. However, even if the speculation proved true, no guarantees exist that HBI stock would be better off.

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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.