Dr Martens Up Off Lows After Trading Announcement – Recovery To Continue?

Trade Dr Martens Shares Your Capital Is At Risk
Tim Worstall
Updated: 28 Jan 2022

Key points:

  • Dr. Martens share has not performed well since the flotation
  • A big headwind is that Permira owns such a large stake to liquidate
  • The operating results look good though and might overcome
  • Dr. Martens Share Price Hit By Stake Sale

Dr. Martens (LON: DOCS) shares were more than fully priced when they came to market last year. As a result, they’re significantly down from that original flotation price of 370p. There was an initial leap to over 500p but it’s been a bumpy ride downwards since. Given the performance of the underlying business, this might seem a little unfair but there’s a reason.

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As we’ve noted before about Dr. Martens there’s a significant shareholding that might be liquidated. Permira bought the company in a private equity deal in 2013 and then brought it back to market a year ago. Just a month back they then sold off some 6% of the company at 395p rather than the then market price of 430p.

That’s not much of a problem, we can imagine that a month after that the stock is securely placed and there’s no great wash of share to continue to depress the price. Except the worry is that Permira still owns a further 36%. The assumption has to be – is in fact – that any significant rise in the Dr Martens share price will be greeted by another placement of some of that stock. True, that 36% is locked up for another 2 months as a result of the last placement but this does produce a cap on any likely share price movements.

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So, we’ve a likely but not hard cap on the Dr Martens price. On the other hand, the results in the recent trading announcement were good as well. Yes, there have been problems. Covid lockdowns ceased production for three months in Vietnam, where a third of production is located. This is now over of course. There were problems in being able to supply the wholesale channel as a result and these are again over, or soon will be – stock is on the water to the American retailers for example.

It’s also true, as the management points out, that diversion of that wholesale stock to the direct sales arm increased gross margins.

So, from an objective analysis of the operating results, we seem to have, in Dr Martens, a company doing well given recent global events. We might think that this provides a base level for the shares. Then we’ve that technical issue of any significant price rise – above where Permira sold before for example – possibly leading to the arrival onto the market of some of that private equity stake.

Possibly we’ve a cap and a floor therefore to the Dr. Martens share price. If this is true, and it is only one of the possible analyses, then a speculative trading strategy becomes possible. Buy at what is thought to be that floor and sell as it approaches the levels likely to create another placing. Like all strategies, this does depend upon the analysis being correct of course.

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