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If the Shoe Fits, Buy It

If the Shoe Fits, Buy It

Posted On September 11, 2015 11:06 am
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This footwear maker is kicking butt across casual and alternative athletic sectors.

As Nike (NKE) and Under Amour (NKE) duke it out for dominance in the high profile, high performance sports such as basketball, football (both versions) and running another company is gobbling up market share and racking up profits by serving the masses with a multitude of styles better fitted for casual and alternative activities. It has become the brand of choice for millennials, X-gamers and people in general that don’t aspire or pretend to be world class athletes.

Skechers (SKX) designs and distributes footwear for men, women, and children. The products range from casual footwear such as sandals and casual shoes to boots to lightweight performance-inspired sneakers favored by skateboarders, surfers, mountain bikers and hikers and other more “laid back” endeavors.

The irony is by avoiding the “mainstream” sports that Nike, Under Armour and Adidas focus on, it has been able to address a much larger market and serve a broad swath of consumers with little to no overlap. Its success in evident in its stock price, which has far outperformed both Nike and Under Armour by gaining some 150% over the past 52-weeks.

That performance include a recent 15% sell-off during the month of August which took shares from an all-time high of $160 to their current $135 level.   The stock has now held important support along the $130 level gap left from its July earnings report and has been building a bullish wedge for the past two weeks.

SKX chart 9.10.15

This sets up an attractive entry point to establish a bullish position for a new move higher.

The company is set to report earnings during the las week of October and amid the general market tumult investors seemed to have lost sight that it’s expected to grow top and bottom line by 35% and 29% respectively. Yet is now trades at just 26x forward estimates of earning $5.20 a share in fiscal 2016.   That is a discount to both NKE and UA which trade at 29x and an eye popping 74x respectively despite lower growth rates.

In fact two months ago analysts had begun raising their estimates for the current quarter from an average of $1.51 to $1.65 a share but have recent pulled back an average of $1.59 a share. I think the tempered outlook is in response to the broad market and does not reflect the fact that Skechers has little exposure to China or other emerging markets in terms of currency or sales.

The lowered expectation now sets up a lower hurdle for the company to jump over powered by strong back-to-school sales. The company has beaten expectations for the past three quarters and I want to get into this stock before analysts start ratcheting up their estimates again.

The Trade

Let’s keep this simple with the outright purchase of longer dated call options.

Specifically I’m targeting the January $130 calls at $17 a contract.

This is what the risk graph looks like:

SKX Risk 9.10.15

I expect shares to reclaim the old highs above $160 by the January 15, 2016 expiration which would give the calls a value of at least $30 for a 76% gain. That would be pretty casual.

About author

Steve Smith
Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.