There has been a lot of conjecture about Qurate Retail Inc. (NASDAQ:QRTEA), and understandably so, since the outcomes appear to be binary for stock investors, with heavy debt and industry headwinds putting bankruptcy on the table in the coming years. I agree with the judgment that the company has enough cash to last at least until 2024, given its debt maturing schedule, but it also runs the risk of tripping restrictions on its revolving credit facility if operating income is not swiftly restored.

That being said, I believe QRTEA shares offer an appealing risk/reward payoff because there appears to be a low risk of bankruptcy in the near term, the company has a strong history of free cash flow generation, and higher interest rates give the company the opportunity to make significant positive changes to its capital structure. With the recent release of the Sune smartphone application, I believe the market is completely ignoring an area of high-margin prospective growth.

Why Is This “Intelligent Speculation” Necessary?

In the field of security analysis Graham and Dodd suggest a method of “intelligent speculation” that entails buying stock in a number of highly leveraged companies that have a fair chance of survival during times of economic hardship. For obvious reasons, these stocks tend to overcorrect, both to the downside and to the upside. When circumstances are rough, interest charges have a greater impact on earnings, and the stock is bid down more than its conservatively leveraged peers.

If and when earnings rebound, the same effect will be reversed to the upside. Interestingly, Graham and Dodd also propose buying shares in these types of companies at a lesser price, such as a $4 stock rather than a $400 one. This is because the lower share price has a psychological effect, and a $4 stock is theoretically more likely to double or triple than a $400 stock.

This psychological effect, I believe, will be much more obvious when we get into stocks like QRTEA, which has fallen from grace to prices as low as $1 per share. Furthermore, many institutions are prohibited from investing in penny stocks, so selling pressure is likely to be heightened. The company’s market valuation has lately dropped from multibillions to roughly $300 million, which may limit interest. Any recovery will very certainly be accelerated because these variables could all reverse at the same time.

The Sune Rollout Has Gone Completely Unnoticed

Despite the fact that the announcement was mostly disregarded by the market, the recent launch of the company’s mobile live-stream video shopping software, Sune, merits special attention. Bears have frequently chastised QRTEA for its narrow consumer focus and declining customer base, thus expanding into app format with a focus on a younger audience ought to be commended. Importantly, the app clearly states that orders for most products will be fulfilled by the brand, implying that the Sune rollout will not exacerbate inventory issues. If the program can scale, sales will most likely be profitable.

Opopop popcorn and Poppy and Pout lip balm are typically not items I would purchase for myself, but they make excellent gifts. This type of product, in my opinion, is a suitable focus for the app. When people are at a loss for what to offer as a gift, they can easily turn to Sune for humorous sales pitches on high-end products. A few smaller business owners are also pitching their products, expressing their tales, and utilizing the platform as a fresh way to promote their enterprises. Having a reputation for these types of products will enhance the app’s thrilling and distinctive “discovery” component.

In addition to these types of discoveries, video e-commerce hosts can try on things or demonstrate how they work. People may identify hosts who have comparable styles or body types to them and may be able to order things that are a better fit. App store reviews should be taken with a grain of salt, but one satisfied Sune user characterized the app experience as follows:

For most of this I would just scroll by on regular e-commerce websites, but seeing demonstrations or try-ons changes everything for me. I can’t stop buying.

Despite fierce competition, the total addressable market could be enormous and is expected to increase further. 

For comparison, 3.5 trillion yuan is roughly $500 billion USD, and this market, at least in China, shows no signs of slowing down. In the United States, this is a relatively new area that is showing early signs of strong growth, and QRTEA, with its already-established video commerce capabilities and processes, might be a natural leader in the space.

Options for Getting Out of Debt

Due to increasing interest rates and a decrease of the company’s credit rating, much of the company’s termed-out debt and preferred shares are trading for pennies on the dollar. This may provide the company negotiating power when refinancing or allow debt to be retired at a great discount. Of course, this is only possible if the company generates free cash flow. If the company’s cash generation is restricted and it can only pay off debt as it matures, the discount will be minimal. Here’s a list of some of the company’s short-term bonds and their most recent selling prices to give you an idea:

Of course, managing shorter-term maturities and avoiding default is critical. However, if the company ever has excess cash, it can scan the capital structure to see what would provide the highest rate of return. Interestingly, retiring preferred shares, QRTEP, offer an 8% coupon and are going for 30 cents on the dollar right now, making them one of the best investments right now. I understand that skipping preferred coupon payments does not usually result in bankruptcy. At these prices, one dollar spent on QRTEP would save more than 25 cents per year in coupon payments, not to mention the reductions in future maturing responsibilities in 2031.

To demonstrate how good a deal this is for the company (I know it’s unlikely) if QRTEA could theoretically buy back all of the preferred stock now at 30 cents on the dollar, it would cost $380 million, save the company around $100 million in coupon payments each year, and avoid a $1.26 billion payment in 2031. A very good return on investment.

Risks Recent Short Interest Increase

Many bulls have noted QRTEA’s low short interest, though I’ve noticed a recent increase, with 9% of the float shorted compared to 6% a month ago. Something to keep an eye on is the end-of-April short interest report, which is set to be released on May 2nd. This is important to notice because it comes before the forthcoming earnings report on May 5th.

Factors Affecting the Macroeconomy

Other discretionary shops like Big Lots (NYSE:BIG) have similar patterns. 2022 was a bad year for customers, and corporations are confident that things will improve soon. It is unclear whether discretionary spending will return in the near future, and with rampant inflation, basics are expected to devour a higher share of consumer incomes. Of course, this leaves less money to spend on luxury products from QRTEA, and if this is a long-term issue, the likelihood of bankruptcy increases significantly.

Competition

Streaming e-commerce has several competitors, including the majority of the major technology businesses. These firms have substantial coffers and are often willing to grow horizontally even if it means operating at a loss. This will most likely put pressure on profits, but it may be compensated if the market increases quickly.

Schedule of Debt Maturity

As previously said, if free cash flow creation is limited, the company will be unable to gain cost savings on its debt, since the closer the bonds are to maturity, the closer they will likely trade at par value. Of course, there is a risk of bankruptcy in the coming years if capital is not carefully managed or if headwinds persist.

Conclusion

Finally, I believe QRTEA is a viable candidate for inclusion in a diversified portfolio of Graham and Dodd’s “intelligent speculation” stocks. The market is highly negative about the company right now, and perhaps fairly so, given the massive debt and lack of profitability. Having said that, there appears to be enough liquidity to weather headwinds for the next 1-2 years. If free cash flow creation can resume when economic conditions improve, QRTEA may be able to reduce debt or purchase back preferred shares at a considerable discount if interest rates remain high.

I also feel the market has entirely overlooked the potential growth in live-streaming e-commerce industries, and with the launch of Sune, QRTEA has the opportunity to be a leader in this field and extend to a younger client base. If QRTEA can return to producing $1.5 billion in EBITDA, which is less than 75% of normal business years, a conservative EV/EBITDA multiple of 6 indicates an EV of $9 billion, with more than $1 billion of upside due to equity investors at current market prices. Investors should wait until earnings are revealed later this week before making a decision.

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