More Thoughts on Skechers

I continue to think about Skechers. I updated my post to reflect some of my recent thoughts. I doubt that Skechers currently has a durable competitive advantage. The company was downgraded last week by an analyst who is concerned that fashion trends are headed in a different direction. This is a risk that I had not really focused on, but it is certainly reflected in the history of their earnings. They are either riding a wave of success or retooling their designs to catch the next trend. From this perspective, Skechers could be viewed as almost a cyclical stock.

The stock just looks so cheap. At roughly 12.5 times trailing-twelve month earnings, it is practically priced for no growth. They have managed growth through some pretty rough times, and they have a defensive balance sheet with over $4 per share in cash. The stock dropped after the downgrade, but has since started to recover. Over the long term, the downside looks limited from here. Market volatility over the short term could certainly cause another drop. On the other hand, a couple of strong earnings reports could push the stock much higher.

It is interesting to note that the analyst from Morgan Stanley has finally reacted to the drop in Skechers from its 52-week high of almost $50 to its current price of around $22. I think this represents short-term thinking at best. At worst, it is advice to buy high and sell low. It is difficult to make money with that strategy.

The buy and wait strategy is probably a good one for Skechers. The stock could double sometime in the next 1-3 years. I also looked at the January 2017 $25 calls. Buying the stock and selling calls could help lowering my cost basis. I could buy the stock at around $22, then sell calls to get back about $1 per share. I cap my upside here at $25 plus the $1 on the calls. The cap is around $4 per share over the next 4 months, or 18% upside. That’s not a bad idea, but I am reluctant to cap upside. I also looked at diagonal calls. You could buy January 2019 $15 calls for around $10 and then sell the January 2017 $25’s for $1 back. So $900 for controlling 100 shares with big upside, but the downside is a little scary with this stock. If the market tumbles during this time, it would be tough to sell more calls going forward.

For now, I think it is better to play it straight on this company. Buy and wait. I don’t view this as a long-term hold and would look to exit if the company recovers to around 20x earnings, or around $40 per share based on my current estimates.

Disclosure: I hold shares of Skechers. This post is not financial advice, just a starting point for research and further education.

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