“Skin in the game” is a phrase you will hear me use often.
The idea that the people in charge of things should have a stake in the outcome is one that could fix almost all of the problems we have in the world today.
While elected officials, hedge fund managers, and corporate executives participate in the upside when things work out well, very few of them take the full brunt of the pain when things go south.
If executives screw the company up and don’t own a lot of stock, as is often the case, they may lose their job, but they don’t lose their money like their investors do.
I want the people running the companies I own to have a lot of their own money in the deal, that way if they make a mistake, it’s as painful for them as it will be for me.
I want their economic future to be impacted as much if not more than mine will be as a stockholder.
Consider the wonderful world of retail. It’s been a disaster as e-commerce is playing a larger role in how we shop every day.
We have seen chains disappear from the retail landscape, and more are almost certain to fall by the roadside as more and more purchases are made online.
That slide will eventually end, and those companies that survive until they can thrive again will end up making huge profits for those brave few willing to take the plunge and withstand the volatility.
One of the best ways to identify those retailers who will survive the storm and prosper is to see who has the most to lose if they fail.
Executives that don’t directly own a lot of stock in the companies they run can simply hang out the “closed” shingle and walk away without any permanent loss and very little personal financial pain, unlike their luckless shareholders.
A Retail Rollercoaster Veteran
My bet for a retailer would be The Gap Inc. (NYSE:GPS).
The Gap was founded back in 1969 and has already experienced severe recessions, stock market crashes, periods of inflation and deflation, and have survived it all.
Gap currently has 3,194 company-operated stores and 472 franchise stores as well as e-commerce sites.
Their brands include Old Navy, Gap, Banana Republic, Athleta, Intermix, and Hill City.
I’m not a retail expert, but I am married to one, and the father of two additional experts on where to shop. They all assure me that Gap and Old Navy are still pretty high up on their preferred shopping destinations for casual clothes.
Yes, retail is struggling a bit, but there’s no looming financial disaster on the horizon for Gap.
They have $1.1 billion of cash on the balance sheet and in the past year and generated $1.4 billion in operating cash flow.
Free cash flow was $676 million in 2019. Unlike most of their competitors, they have actually opened stores in the past year.
They’re not growing, but they aren’t dying, either, and at the current stock price, all we are paying for is a carcass.
Management is still paying a dividend which at today’s price provides a yield of over 6%.
They also continue to buy back stock, and in the second quarter, Gap repurchased 2.7 million shares for $50 million.
Management plans to buy around $50 million per quarter through the end of the fiscal year 2019.
The combined cash and buyback yield is about 8%, which is outstanding when compared to other retailers today.
The most compelling reason to think Gap will make it is how much their executives will suffer should they fail. Collectively the insiders won $2.4 billion worth of stock.
Three members of the founding Fisher Family are still on the board and own more than 170,000 shares worth more than $1.5 billion.
Their family fortune and reputation are at stake, and I don’t think they will go down without an epic battle.
More Than a Job at Stake
In addition to the Fisher’s financial legacy, Gap CEO, Arthur Peck, will also lose more than just a job if Gap fails.
He owns over 300,000 shares of stock worth more than $4.5 million, so if Gap fails, he loses a huge chunk of his personal fortune.
There are already signs that the highly incentivized management team is taking steps to turn things around.
They recently announced they will spin-off Old Navy sometime next year so the growth potential of that brand can be recognized on a stand-alone basis.
That alone should get the value of the two separate companies a lot higher than the current quote.
Keep in mind I’m not suggesting buying Gap for a quick trade.
I’m also not talking about piling into the stock all at once.
It’s going to be a rough ride for retail, and I’m not exactly exuberant about the broader stock market right now.
I would buy a little here and enjoy the nice dividend. Then I’d add a little bit more over time as the death of retail headlines causes a selloff in the stock, or we see a correction in the broader market.
There is more than enough skin in the game to keep the folks at the Gap focused on turning around the ship.
That skin in the game makes this an excellent stock to utilize a start small, move slow buying approach that should make us an enormous amount of money when the dust finally settles in retail.
Work Smarter, Not Harder
Having a stake in the outcome is a possible fix for a lot of problems inside the investing world and out. When companies and individuals have the opportunity to take control over their financial future, good things can happen.
With the help of the right strategies to create additional income streams, you could take control of your future and put that money toward your financial freedom.
Whether that means paying off debt… achieving early retirement… or spending more time with your families…
This simple and easy strategy can offer you those opportunities.
You can just “set it up and forget it” – and then, you can receive regular checks in your mailbox.