Value Watch List - Joann Stores (JAS)

For a while now, I have had a watchlist of distressed stocks. My watchlist is really for two reasons:

1. I want to learn how to have more confidence in seeing a distressed stock and being able to pull the trigger on it because the fundamentals say so. After all, I am in B-school to learn the fundamental aspects to investing! Buffett would be proud.


2. To understand what makes a good distressed stock, while some others are distressed because, well, they have issues.

One of the stocks on my watchlist is Joann Stores (JAS) (Chart). Most people know the store. In fact, I was in one over the holidays. (They have great scented candles in there, BTW). My girlfriend is a shopper there because of the scrapbooking materials. However, according to her, Michael's (MIK) (chart) is a better store.

A simple look at those charts shows that Michael's stock has been a better performer (if you increase the timeframe, you'll see that MIK has performed well over the past 3 years). This prompted me to read a few analyst reports, and to listen to the most recent conference call. The company is trying to convert most of its stores over to "superstores". These mega-Joanns appear to have better financials than the smaller stores. An average store is 14,000 square feet but these superstores average 35,000. Will that cause my girlfriend to someday say that Joann is once again on the hip list to shop? That's a good question. Perhaps we need the girl's name "Joann" to come back in favor. It's been uncool since the sixties. And, Michael is a very popular guys name. My marketing prof. would be proud for me picking up on this simple but powerful difference.

But, looking at Joann's share price is interesting. The company has lowered guidance for the year, and it posted a loss for all quarters in 2005. Management has changed in many key areas, although not at the CEO level. The company is certainly seeing hard times today, and that is likely to continue, but, I believe that the company is intriguing here. Given the time crunch, I haven't really DRILLED into the #'s yet, so I am using an S&P stock report which says that the shares are worth $17. From here that would be a 50% gain. How much more downside is there? For me to take this position I would need two things:

1. A perceived 16.6% downside. I like 3:1 Reward-to-risk ratios, and am very disciplined about this.


2. Technicals that line up and say "it's go time".

I have niether just yet. But, things appear to be getting close. So, JAS stays on the watchlist, and perhaps even gets bumped up a little bit.