Momentum investing can lead to powerful gains. That's why some
investors suggest you should always "let your winners ride,"
presumably to even higher prices. This was my logic when I
The footwear maker's stock had already surged 1,200% in just 15
months, and shares still looked reasonably valued. Since then,
they've risen another 85%, now trading at about $26 a share.
However, letting this winner keep riding may prove risky -- shares
are valued well above the peer group and investor expectations
about future operating performance are quite high.
But we live in a different reality now. After a strong two-year run
for the major indexes, a cautious tone has set in and momentum
investing has become an unsafe strategy. Instead, it's time to play
defense and seek out names that will hold up in down markets, while
still posting upside in rising markets. Looking at the peer group
for Crocs, I can't help but notice the stunning valuation for rival
Collective Brands (NYSE:
Through its 4,833 Payless ShoeSource stores around the globe, the
company designs and sells footwear and related accessories under
many widely-known brands, including Sperry Top-Sider, Stride-Rite,
Keds and Airwalk. It's not a high-growth business, but it's wildly
profitable and shares are quite cheap, having fallen by a third
since late April. Shares now trade right at
, which makes the stock a compelling value play.
Why the selloff? For starters, the flagship Payless stores have
seen a slowdown in traffic in recent months because its
lower-income demographic is still feeling the lingering effects of
and persistently high unemployment. Rising gas prices also affect
consumer spending, since many people have to cut back in other
areas of their budget to cope. So when gas spikes to $4 a gallon,
footwear sales inevitably take a hit. Because of this, investors
are assuming sales will remain weak for at least the next few
quarters. In addition, feeling the heat of this slowdown, the
company's CEO, Matthew Rubel, recently resigned.
However, the beauty of this business is in its long-term
consistency. Footwear purchases can be delayed, but not avoided
altogether -- shoes invariably wear out from use. Smooth out the
annual gyrations, and Collective Brands manages to boost sales 3%
to 4% every year, with
before interest, taxes,
) growing at twice this pace.
Ironically, the recently-departed Rubel had begun to put Collective
Brands on an even better trajectory, boosting the wholesale
distribution of shoes to other retailers (which currently represent
20% of sales) and pursuing international expansion (representing
14% of sales).
From fiscal (January) 2007 to 2009, the company generated $45
million in annual
free cash flow
. This figure shot up to $204 million in 2010 and slightly declined
to $174 million in 2011. The robust
is helping the stock in several ways. First, Collective Brands has
begun to repurchase shares more aggressively -- it bought back
53,000 of its own shares for $1.1 million during the first quarter
of the year. Second, the company pared $100 million from
in the past year, which now totals roughly $658 million. If current
cash flow trends persist, then Collective Brands can maintain both
of these trends.
To rebuild the stock price, the board will need to appoint a CEO
with vision. The new leader will have to implement needed
corrective actions -- perhaps accelerating the international store
expansion or taking a fresh look at merchandising efforts. Another
bold move would be to cull the weakest 10% of stores from the
company's 4,800 store base (current plans
for a net reduction of just 30 stores). At a minimum, renegotiating
lower lease rates while mall operators are in a weakened state may
help boost margins.
Action to Take -->
To be sure, the loss of a CEO and a same-store sales drop warrant a
pullback in a stock's price. But at $14 a share, this stock is too
cheap to ignore.
If the market tanks or the company fails to boost results, then
shares could simply languish at current levels (receiving support
from the $14.42 book value and EBITDA multiple of 4). However, in a
brighter scenario of a rising market, improving consumer sentiment
or a well-regarded new CEO hire, this stock could quickly move back
to the low $20s, where it stood this spring. That's 50% upside,
with minimal downside.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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