Coach, Kors, Tesla: Stick With Stock Trends Until They End

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In commoditized markets, unless the barriers to entry are significant, nothing last forever. Even with significant barriers, sometimes even that isn't enough to stop a revolutionary approach from taking hold. Let's look at two examples.

Coach ( COH ) has owned the upscale handbag market for three years. Quarter after quarter revenue and earnings growth exhibited double digits, never seeming to slow. That was until about a year ago when upstart Michael Kors ( KORS ) began to pick up steam; it has now clearly overtaken Coach with respect to revenues and earnings growth.

Stock YoY Qtrly Revenue Growth YoY Qtrly Earnings Growth
Coach 5.80% -12.00%
Michael Kors 54.50% 82.10%

If you plot the revenue and earnings growth curves you'll see something that is akin to plotting the price chart, where Michael Kors just keeps climbing and Coach falls. Note that these are not short term trends, either. This is taking place on the long term time frames as shown here in the monthly charts (all charts courtesy of tatoday.com .)





It's rather obvious which stock you should be invested in if you are going to be invested in this space. KORS still most likely has a good two years of accelerated growth if it continues to execute. So far I see nothing fundamentally or in the charts that would argue against that happening. I have been invested in KORS for about a year already and it is a long term holding.

Clearly the barrier to entry in the handbag market is not nearly what it is for automobiles, but even there, some revolutionary thinking and technological innovation can move mountains. If the timing of those qualities is combined with a shift in the consumer's mindset and a growing investor appetite, then you can see an explosion in price -- which is what has happened with Tesla Motors ( TSLA ). The chart says it all: an almost 500% gain in a little over half a year for a company that carries a forward PE of over 100! I don't even need to show a chart of General Motors ( GM ) or Ford ( F ).



Now, there's no way I will argue the fundamentals on this stock, but you know what? The fundamentals don't drive price in the short term -- technical action does. In the case of Tesla, the biggest story was sitting in the short interest figures, which where astounding. Note that the peak short percentage of float registered in at 64.9% in April, which, as shown on the chart, is where the short squeeze really got started with a breakout of multiple swing points on multiple time frames.

Date Peak Short % of Float
8/2012 20.2 %
9/2012 27.2 %
10/2012 26.5 %
11/2012 26.2 %
12/2013 25.3 %
1/2013 24.4 %
2/2013 52.5 %
3/2013 53 %
4/2013 64.9 %
5/2013 49.2 %
6/2013 29.8 %
7/2013 31.9 %
8/2013 29.6 %

In this market of infinite up, there continue to be amazing runs to the upside where a 40% gain in KORS pales in comparison to a 500% gain in Tesla. To call for an end to this "infinite up" is a difficult task. Picking a top is never an easy job. It is always far simpler and more rewarding to stick with the trend until it really does end. Even if you are trading off the daily charts, there are only divergences so far that have yet to materialize into anything more. I'll let others keep calling the tops and I'll just keep working the trend, buying dips and selling rips. You and I both know these nonsensical gains will end at some point, but just as with handbags and cars, you need a signal that the end is upon us. You need a change in trend. That change has yet to occur, so rather than guessing that it is about to happen, or worse, hoping that it does, just continue working trades in the direction of the prevailing trend until it actually happens. There will be time to reverse course when that occurs.

Twitter: @tatoday



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: COH , F , GM , KORS , TSLA

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