Skechers - More On Value Points

Fools,

If you’re a long-term investor in Skechers and were waiting to put more money to work, you may be thinking that yesterday was a good day. The price of the stock has decreased 7% yesterday and is down about 20% from its high. Perhaps it has something to do with insiders selling (check out the latest Form 4).

http://skx.com/investor/sec.html

Perhaps it’s just fear taking hold.

Regardless, is now a good time to buy the stock?

Under most metrics, the answer is yes, especially if you’re in it for the long-run. However, if one looks at historical value ranges, there could be a bigger drop ahead, despite the great numbers, and we may have an opportunity to buy shares at a much better value point, which is in line with historical valuations.

Since the beginning of 2013, the P/E range has been between about 17 and 40, topping out earlier this year prior to the market turbulence. The high end of this range has not been a common, occurring once in August 2015. The low end has been seen in each of the last four quarters, despite the phenomenal growth in earnings.

Even after the big drop, today’s P/E is about 31.5, which is at a higher level than any time between the end of 2013 and June 2015. If the P/E would drop to 17, the share price would have to go all the way down to about $75 assuming they hit analyst expectations this quarter.

There are, however, a few good reasons why we most likely won’t see such a drop in price.

First, the company is executing a lot better now than it has in the past few years, which is evidenced by the substantial increase in EBIT margins:


EBITMar	Mar	Jun	Sep	Dec
2011	2.9%	-11.7%	0.4%	-33.7%
2012	-2.1%	-1.1%	3.6%	1.7%
2013	2.2%	3.1%	8.2%	3.7%
2014	8.1%	8.6%	10.1%	5.0%
2015	10.5%	14.0%		

Also, the net cash and long-term debt positions have vastly improved as well.


Cash	Mar	Jun	Sep	Dec			LT Debt	 	 	 	 
2011				$351			2011				$81
2012	$392	$374	$308	$326			2012	$78	$71	$70	$129
2013	$265	$333	$333	$372			2013	$126	$123	$120	$118
2014	$329	$415	$441	$467			2014	$116	$125	$128	$35
2015	$397	$514					2015	$35	$26		

The company deservers a higher multiple than the market has given it in the past, because every incremental increase in revenue is resulting in about 60% more EBIT (so far this year) than last year and it’s in a much better financial position.

Perhaps control over inventory is one of the reasons behind this improvement.

http://www.bloomberg.com/news/articles/2015-08-20/skechers-l…

With fear a driving factor in the price today, a very good price to buy would be around $95, which reflects the P/E midpoint of the average high and average low over the past two years (21.3) applied to this quarter’s expected TTM earnings of $4.43.

See the P/E table on my prior post for the ranges:

http://discussion.fool.com/skechers-31917433.aspx

Here are expected values at relevant P/E ratios using the expected $4.43 TTM and $6.42 TTM expected by the end of 2016:


17.2	20	21.3	26.7	28	30	40
$76	$89	$94	$118	$124	$133	$177
-40%	-30%	-26%	-7%	-2%	5%	39%

17.2	20	21.3	26.7	28	30	40
$110	$128	$137	$171	$180	$193	$257
-13%	1%	8%	35%	42%	52%	102%

Basically, Skechers is a company with increasingly good performance and prospects. It’s business execution is improving and the share price has risen dramatically over the last year or so. The market briefly gave it a premium valuation (40 X TTM) in August, which has come down quite a bit recently and could go down further if it follows historical ranges.

As the market is driven by fear now, we may see us getting closer to historical valuations. It’s impossible to say when the share price will revert back to the higher range of its valuation. But for long-term investors, the fact that margins and the balance sheet are a lot better than they have been over the past few years mitigates the likelihood that we’ll see us hit the low end of the valuation range.

Regardless, $94 share price would put us back at an average value point we had last year prior to the big run-up. With a company that is executing really well, this would be a great price to buy. But it is highly likely that we won’t get this price, because sentiment can turn really fast, especially when the fear is confronted with the reality that world economies are growing.

DJ

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During market corrections company fundamentals cede place of honor to investor sentiment. In other words, don’t buy falling knives. Wait for the knife to come to rest. That way you avoid bloody fingers. :wink:

Denny Schlesinger

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Hi Denny,
This is great suggestion, would you mind sharing some of your observations as what signs you will be looking for to know the knife is not falling anymore? Thanks!

Zangwei

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Hi Denny,

Thanks for all your posts here, as they are very thought provoking.

As this one:

In other words, don’t buy falling knives. Wait for the knife to come to rest. That way you avoid bloody fingers.

I also would like to know basically when the knife ceases to fall.

My bandages are used up.

Cheers
Mark

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would you mind sharing some of your observations as what signs you will be looking for to know the knife is not falling anymore?

Very often when a stock or a market falls, it takes a while to rebound. Occasionally there is a v-shaped recovery - a fast bounce up and you “miss it”. But more often the selling tails off and the stock chugs along sideways for a while. Then people start thinking it is done and start nibbling more and it starts to form the right side of the pattern. A little good news here and there and maybe some nice up days on volume showing the big boys are coming back in.

First be cautious and when you think the bottom is in buy a tiny bit and wait and see. Look for the renewed volume on up days. Look for it to cross back above the 200dma and/or 50dma. If you have a plan to invest a certain amount and you believe the underlying company is good, then you can use these events as points to nibble or add more. There is no guarantee, but human psychology is what causes patterns to repeat so sometimes we can use them to put the odd more in our favor.

If you take the SA 5-10 year investment horizon, then it does not matter how bloody your hands get, in 10 years it will all be rainbows and unicorns.

FYI, right now the market is in an “IBD Correction”, meaning there has been enough distribution days to qualify for a “historically backtested correction” where you should be high in cash if you are a shorter-term speculator (which we are not here), but those short term growth speculators are in a lot of the same stocks as on this board, so they will affect them.

IBD says wait for a “Confirmed uptrend” to start buying growth stocks. I have talked about that before and won’t repeat it. But again, that is not the approach to this board.

I am sure that helped not a bit.

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I am sure that helped not a bit.

Actually Pete, I think your explanation helps a lot. It reminds us that the markets are irrational, emotional, and very, very moody. People can get scared off quickly when money and livelihoods are on the line. Fear and uncertainty trumps rational thinking.

Your explanation also gives us insight on the sharp V back up and why that happens. Those same people, once scared of losing their fortunes, have the same livelihood to consider when the trend reverses. Here, greed takes over, but fear contributes too - the fear of missing out.

I think knowing about these cycles only helps us become better investors. It’s also comforting to know that what goes down must also come back up - if we stay rational through the turmoil and stay true to our thesis.

Now that I understand the irrationality of swings a little bit better, and knowing what I know from the “rational” side, I am going to go on record by calling the bottom on this one. And here’s why:

  1. The unnerving of the markets around China is hugely overblown and almost universally misunderstood. China’s GDP growth is slowing down, yep, that is true. But so what? It’s been revised down from 7.0% to 6.9%. Seriously? We’re going into a tailspin over a tenth of a percentage point? 6.9% growth is certainly is certainly nothing to sneeze at.

  2. Staying on China just a bit more, the nation is transitioning from a manufacturing economy to a consumer-driven economy, so expect contribution from manufacturing to continue to go down. But that doesn’t mean the economy ends - it transitions. Instead, the economy will become a nation of consumers who actually buy things - just like many of the Western nations that do today. We got a glimpse of this in effect from Nike’s blowout report last week citing growing sales in China. We’ve also received confirmation from the Skyworks management team about a month ago re-stating their strong view of forecasted pipeline. Then we heard it again from Tim Cook who gave us a rare inside look at the first two months of last quarter where he told us demand in China was not only robust but it was accelerating. Bottom line: there are a lot of great companies who make really great products, and there are a lot of newly minted middle class citizens who want to drink Coca Cola, be like Mike, and show off their iPhones and Apple watches. If you think the Chinese don’t have the means to pay for these things anymore because they lost a fortune in the stock market, well we need to think again on that, too. A statistic was shared on this board where only 1 in 30 of the Chinese are actually in the stock market, and they treat their market like one big gambling institution; like playing the lotto. Serious life savings simply aren’t thrown in there.

  3. The US economy continues to grow, and like it or not, there was a sufficient amount of debt-driven stimulus injected into high-tech investments and research areas during the financial crisis that we’re actually now beginning to reap those rewards. Painful as it may have been and agree with it or not, we’ve spent it; and while it didn’t happen overnight, it created an “artificial” demand for high tech jobs spurring more innovation and more economic activity and providing more taxable revenue to pay off the thing that got us here. Lucky for us it only gets better from here as we look at IoT, high speed data networks, self driving cars and heaven knows what else is around the corner.

Earnings season is upon us. When the data starts to trickle in, and it shows that all is not as bad as it appears, and demand for quality products and services continues to be robust - not only will the market let out a huge sigh of relief, but it will be a mad dash to rush back in once everyone learns about the big mistake they made.

But I guess it is because of these cycles that true wealth is generated. The smart money knows this, and they know that demand from China’s middle class is actually going to be pretty huge. Large fortunes are about to be made, all by letting misinformation continue to propagate, a little bit of market manipulation here and there and being opportunistic when the situation arises - cleverly labeled as market volatility. Here’s to market volatility. Good times will be had for those who stay true.

Best,
–Kevin

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I think you have missed the elephant in the room. The worldwide adoption of reckless profligacy and subjugation of the free market as an economic lodestar has led to extraordinary world debt levels which in many cases will prove unserviceable. The policy will prove to have been a chimera.The six-year party has been fun but has led to the serious inflation of assets, most visibly in stock market indexes.

Reversion to the mean may be deferred longer but my feeling is that the process is underway. In the US, it is noticeable that the market is slowly starting to understand that earnings ratcheted up by acquisitions, and buybacks at inflated prices, do not give a true picture of real earnings at all. Chinese growth is unknown; it could as easily be 3% as 7%. Japan is on skid row. The life of that weird currency without a polity, the euro, is finite. And in emerging markets…

In the country of the blind, the one-eyed man is king. I am glad to invest in America but I think we are all going to have to be careful now and work much harder.

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Streina

Have you been at the party making money for the last six years and have now decided it is coming to an end?

Or have you been saying this for the last six years and think/hope you are finally right?

Robert

6 Likes

Now that I understand the irrationality of swings a little bit better, and knowing what I know from the “rational” side, I am going to go on record by calling the bottom on this one. And here’s why:

Kevin,

What a great post! I very much agree with your reasons, and baring a disastrous geopolitical or other global catastrophe, we should see higher stock prices in the mid- to long-term.

However, to call a bottom is totally hit and miss. You can call a bottom but whether that will occur is totally unknown. I’ve mentioned CNBC before and 90% of the stuff on there is people making predictions. One guy says it’s going up, the next guy says it’s going down. The third guy says we’ve hit a bottom. The truth is these are just guesses and the short term future just can’t be known. The other 10% is actually really useful information in knowing to help us assess situations. the trick is to filter out useless information that could potentially scare us into buying or selling when we shouldn’t.

I would add to your post and say that we should be focusing primarily on the companies that we own and analyze the conditions and try to predict the future based on those conditions and a number of other factors. Then based on all that info we must make an overall call on what to do, buy, sell, hold, reduce, add, switch from one to another, etc. We can’t know what will happen for sure in the short run but if we follow closely and analyze carefully, then we can place our bets accordingly for a great chance at longer term success.

Chris

6 Likes

maybe some nice up days on volume showing the big boys are coming back in.

After AMBA got crushed for basically no reason, I decided it was time to look into Technical Analysis so that I could at least try to make some sense of the insanity that others are apparently seeing. I did some googling looking around for the books professionals most recommended, and settled on one of the “bibles” of TA: John Murphy’s Technical Analysis of the Financial Markets. Now let me first say that, whereas every other investing book I’ve purchased has been around $10-$15, this one is $58 in dead-tree format and $68 for the Kindle edition, which I already find to be suspicious (like someone is trying to make money selling the methods rather than from the methods themselves). But regardless, I set out to read the book. And to John Murphy’s credit, he gives the answer right away on page 17:

The truth of the matter is that charting is very subjective. Chart reading is an art… Chart patterns are seldom so clear that even experienced chartists always agree on their interpretation. There is always an element of doubt and disagreement. As this book demonstrates, there are many different approaches to technical analysis that often disagree with one another.

In fact, that’s Murphy’s argument against the common “self-fulfilling prophecy” dismissal of TA by critics: basically, he claims that TA is so subjective that it’s very improbable all the chartists are doing the same thing based on their analysis of current market conditions – there is no one, obvious prophecy to fulfill.

And that is what is so insidious about technical analysis. Even when you’re wrong a lot, it’s because you simply misinterpreted the chart, or used the wrong technique, or put too much emphasis on that intersecting line instead of some other intersecting line, or were looking at the wrong window of time, or didn’t give enough weight to the correlation with some metric, or whatever. You can see anything you want in hindsight: draw enough lines, and chances are one of them intersected with something somewhere that looks significant when you go back after the fact. And I also suspect you can see just about whatever you want in the moment, leading to confirmation of whatever views you already hold about the future (confirmation bias).

And believe me, some of the techniques give you plenty of opportunities to draw a lot of lines :wink: Here’s an excerpt I particularly enjoyed on “Gann and Fibonacci Fan lines”:

Charting software also allows the drawing of Gann and Fibonacci fan lines. Fibonacci fan lines are drawn in the same fashion as the speedline. Except that Fibonacci lines are drawn at 38% and 62% angles… Gann lines (named after the legendary commodity trader, W.D. Gann) are trendlines drawn from the prominent tops or bottoms at specific geometric angles. The most important Gann line is drawn at a 45 degree angle from a peak or trough. Steeper Gann lines can be drawn during an uptrend at 63 3/4 degrees and 75 degree angles. Flatter Gann lines can be drawn at 26 1/4 and 15 degree lines. It’s possible to draw as many as nine different Gann lines.

Nine lines! I mean, how could one of them not intersect something somewhere that looks potentially significant in hindsight? :wink:

Folks, investing isn’t hard: buy a stable of great companies at reasonable values and hold them. Saul’s methods simply add refinement and optimization. Our worst enemies are our emotions and our natural biases, and the more opportunity we give them to surface through excessive trading, chart reading, market timing, or whatever else, the more likely we are to let those emotions and biases influence our decisions for the worse. I like this Charlie Munger quote:

I think part of the popularity of Berkshire Hathaway is that we look like people who have found a trick. It’s not brilliance. It’s just avoiding stupidity.

It’s obviously no fun to see the value of one’s portfolio plummet, as has happened to many of us over the past couple of months. And nobody wants to throw good money after bad: our recency bias makes us all too aware things could keep falling. But speaking of hindsight, just remember: when we get past these very natural downturns (and we always do) and look back on them, they don’t look like risk; they look like opportunity. Try to do your future self some favors.

Nobody knows where the market is going to go from here. You’re going to drive yourself crazy trying to find the bottom, or fretting because a stock you just added to continues to go down. It simply doesn’t matter what these stocks do in the hour after your purchase them, or tomorrow, or next week. What matters when you decide to buy is whether you’re getting a good long-term value: something that will set you up for success over the coming years. After all, we’re not investing with the idea of liquidating our portfolio next month; we’re investing to grow and compound our wealth over the years.

Just my 2 cents, of course. And while I do poke fun at the chartists, I don’t mean any offense: if it really works for you, great. But it’s definitely not for me :wink:

Neil

47 Likes

Robert. It’s a good question. The answer is I have been saying it for about the last three years and the higher multiples got from the mean, the more I increased the cash percentage I was happy to hold and the more I demanded low debt, pricing power and ROIC in my investments. I reckon the opportunity-cost of cash an insurance premium I am happy to pay. Cash has now risen to about 30%.

So as you can see I am extremely optimistic. Clearly I am also a gambler because most of my investments are high-quality growth stocks. That is because I hope, as Goldman puts it, ‘flat is the new up’ - in which case I will continue to outperform even if the party is over. It means the index flatlining until PEs are normalized.

However, I may be dead wrong and down, way down, is the new up. If I thought that, I would be very much a value investor, searching among companies with single-figure multiples and big on total return. But I enjoy having faith in America.

Kevin. There are already disastrous geopolitical and other global catastrophes! I totally agree with your last para.

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Streina

Thanks for your great and honest response. The S@P bottomed in Feb 09 at 740 after the biggest challenge since the great depression.

Oct 2012 (3 years ago) it was at 1413 almost a double and when you became cautious. Understandable.

May 2015 Peak at 2111.

Today 1920.

It’s over when its over. I guess.

Robert

I hope you bought it used.

Maybe you can recoup some of that by selling it?
http://search.half.ebay.com/Technical-Analysis-of-the-Financ…

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The S@P bottomed in Feb 09 at 740 after the biggest challenge since the great depression

I believe March 9, 2009 was a bottom of 666 on the S&P, which gives an even nicer return. I was in a company class off in a hotel somewhere and saw the destruction of that day during a break. I called my wife and we both agreed it was ridiculous and we moved a bunch of 401K cash back into the market. 70% luck, 30% right.

A few days later IBD declared a “confirmed uptrend” based on their rules :wink:

Pete.

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Kevin, you mentioned China being one of the world worries and agree it seems likely the majority of fears are built in. But as they transition to a consumer-driven economy, their infrastructure spending will decline, keep most commodities very low. This will continue to hurt emerging markets that relied on commodities. Rising interest rates will also hurt those same markets.

On the bright side, oil may stay low, but we won’t see another plummet next year like we saw this year. The dollar may stay strong, but we won’t see another big rise next year like we did this year. That is to say, earnings comparisons will be better 2016 vs 2015 than in 2015 vs 2014. That should help sentiment a bit.

November through May is historically the best investment period, and we are almost there too.

Hey Pete - I agree that things don’t bode well for commodities and the emerging markets affected. Growth will go down in a few sectors out there, but not all. We’re not headed for a recession here. If you look at the spoils from a transition to a consumer-driven economy will bring, what does bode well are consumer discretionary stocks (like Apple gadgets, Starbucks coffee, Nike shoes and Netflix movies) and telecom services (to fulfill the desire of the expanding middle class to live in a connected world).

I pulled the chart below off of a recent Fool article that shows what to expect in various sectors with respect to earnings and revenue in the coming earning season.

https://g.foolcdn.com/editorial/images/180452/fact-set-q3-20…

https://g.foolcdn.com/editorial/images/180452/fact-set-q3-20…

Note that beside Consumer Discretionary and Telecom Services, Financials and Health Care are also set to do well.

I think as a whole the stocks identified and talked about on this board remain well positioned, with the possible exception of SEDG at the moment due to it being associated with the energy sector.

Those are just my thoughts. I’m really glad to be part of this forum to hear all the perspectives.

Best,
–Kevin

2 Likes

In fact, that’s Murphy’s argument against the common “self-fulfilling prophecy” dismissal of TA by critics: basically, he claims that TA is so subjective that it’s very improbable all the chartists are doing the same thing based on their analysis of current market conditions – there is no one, obvious prophecy to fulfill.

And that is what is so insidious about technical analysis. Even when you’re wrong a lot, it’s because you simply misinterpreted the chart, or used the wrong technique, or put too much emphasis on that intersecting line instead of some other intersecting line, or were looking at the wrong window of time, or didn’t give enough weight to the correlation with some metric, or whatever.

Would this be as opposed to FA, which lacks subjectivity so that all the FA people who look at a stock all come to the same conclusion as to its value? And when you’re wrong, it’s not because you misinterpreted the numbers or used the wrong technique? :slight_smile:

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Zangwei, Mark:

Thanks for asking. I’m sure by now you’ve read Saul’s SKX, my contrary view on value points! http://discussion.fool.com/skx-my-contrary-view-on-value-points-… where he argues it can’t be done or it’s not worth doing as well as PuddinHead42’s pointers on how to do it. Like religion, these contrary points of view will never be bridged. When I started investing I thought that charting was quackery. Forty years later I think one can read the body language of charts to some degree but I still don’t pay attention to most of the so called “indicators.” In summary, I pick my stocks based on business fundamentals but I pick my buying and selling after interpreting the charts.

According to Ben Graham in the short term the market is a voting machine while in the long term it is a weighing machine. I concur. Over the long term the stock’s price will reflect the value of the underlying business. In the short term the price will be buffeted by all sorts of exogenous factors like market sentiment, herding, liquidity, accumulation, distribution, FedSpeak, job reports, what the Greeks are doing about their debt, and whether Saul likes or does not like a stock. I’m not joking, Saul is a respected poster who influences a number of investors. Back in the tech bubble the so called “Gilder effect” was very real. One day I set out to prove that I could profitably trade a Gilder effect stock. I made a few bucks on 100 shares I bought and sold the same day according to preset rules. Daily price fluctuation seem random but they are not entirely random. Benoit Mandelbrot, a mathematician who studied prices, determined that they had memory and were fractal in nature. Fractal means that a monthly chart will look like a daily chart or an hourly chart (until volume becomes too small). You can apply the same techniques to any chart no matter what the time intervals are.

The trick is learning the chart’s body language. Some charts are more outspoken than others. In the West we use “OHLC” charts while in Japan they prefer candlestick charts

OHLC bar: https://www.google.com/search?q=ohlc+bar&num=50&neww…

Candlestick bar : https://www.google.com/search?q=Candlestick+bar&num=50&a…

They show exactly the same data but I find candlesticks more informative, more revealing. The Japanese view the market as war and interpret the candlesticks as how the bull and bear samurai are faring. They developed this charting method to trade rice.

Jesse Livermore, who learned to “read” the tape, didn’t use charts, he wrote down closing prices. Sorry, I don’t have a link but his book explaining his trading method is available on the web. Livermore was looking at price series without using charts but essentially they are the same thing.

Enough generalities! Here is a year long SKX chart

http://softwaretimes.com/pics/skx-10-03-2015.gif

Around late April a couple of interesting things happened:

1.- The stock gapped up from 75 to 80 something. Lore has it that gaps fill meaning that 75 is an attractor, SKX could drop to 75 before rebounding.

2.- From late April to late July, just in three months the price doubled. This is not a sustainable rate of growth.

In late July SKX went ballistic first gapping up from 130 to 140 before topping out at 160 something. It’s a good bet that after this crazy peak the stock will give back some. It did, the 130 gap filled! Then a month later the 130 mark was retested. By now 130 has become a “support” levl.

What to do? SKX is in a downtrend but at a support level. It could go back down to 75 to fill that old gap or take off or just stay around 140 and build a base for a month or more. Saul is right, we don’t know. At this juncture I would wait to see what the chart says. That’s where those thin lines come in. They are the 50 and the 200 day simple moving averages (SMA). If the stocks starts back up again, you probably should wait until it crosses that 50 SMA line before buying.

All of the above is more art than science so don’t take it too seriously.

Denny Schlesinger

16 Likes

Fractal means that a monthly chart will look like a daily chart or an hourly chart (until volume becomes too small).

One difference that I noticed is that daily gaps from Monday to Friday disappear in the weekly charts, only the Friday to Monday gaps show. I like to see the gaps so I seldom use anything larger than a daily chart, no matter how long.

Denny Schlesinger

1 Like

Jesse Livermore, who learned to “read” the tape, didn’t use charts, he wrote down closing prices. Sorry, I don’t have a link but his book explaining his trading method is available on the web. Livermore was looking at price series without using charts but essentially they are the same thing. – Denny

Is this the book you’re referring to? >>

http://smile.amazon.com/How-Trade-Stocks-Jesse-Livermore/dp/…

Rob