SKX, my contrary view on value points!

Investment Analysis Clubs Saul’s Investing Discussions
#4

Now Skechers has fallen from $160 two months ago to about $133 now. There has been NO bad news. There hasn’t even been a short attack. It’s got a PE of 30.5 and it’s growing TTM earnings at 107% year-over-year as of the last quarter. That gives it a 1YPEG of 0.29 — That’s ZERO point TWO NINE ! What piece of good news could do the same thing for them that happened to Bofi? Who knows? But how about a simple earnings report?

The recent recommendation highlighted all the embarrassments the company had a few years ago before they got their act together. If you consider the PE and other values the company had at those high stress times to be “historical” average values, sure you can say that it’s overvalued or fairly valued now. But if you look at the company as it is NOW, all I can say is that this company is going wild, expanding their brand and their sales, and their margins, and their earnings. If you like it, and want to buy it, take at least a starter position now, because when it’s up $5 you’ll wait for it to come back to where it is now, and if it does come back you’ll wait for it to go lower, and then, all of a sudden, it will be up $20 and you’ll have never taken that initial position.

Yep. It’s fallen from $160 to $130 but almost all stocks have fallen in that same period. Many have fallen by a higher percentage. I think we do have to consider some new information since the last SKX earnings call.

  1. The dollar has not risen in value since then. This is good for SKX. It would be even better if the dollar fell but it not rising is also good news because a stronger dollar will lead to lower earnings in USD especially since a huge component of SKX’s revenue growth is from outside the U.S. Also, a stronger USD makes SKX shoes more expensive outside the USD (assuming the company prices in constant dollar; if they price in constant foreign currency then SKX will take a hit in the form of lower revenue in USD; either way a stronger dollar is not good for SKX)

  2. Management (on the last call) hinted at a strong back-to-school season in the U.S. Now we know that consumer confidence has been improving since then. People are spending money. Today, we heard that there were near-term record auto sales last month despite the stock market decline. If people are buying cars then you can bet that they are also buying shoes!

  3. Then there are all the points that Saul brought up: improving band, improving margins, improving growth. However, we have to temper our enthusiasm regarding the recent growth a little bit because in the March quarter we had the logistical problems including the port shutdown and the distribution center delays. March quarter was weaker than expected as a result. In the June quarter, we had a bumper quarter because there were sales that happened in that quarter that should have happened in the March quarter. If I recall correctly, I think management also said that they had some inventory buildup by their distributors in the June quarter that were expected in the September quarter. I’m not 100% sure (so you should go back and check the conference call) but that’s what’s in my head.

Overall, I expect a very solid September quarter from SKX when they report earnings in about 3 weeks. We will see…

Chris

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#5

Management (on the last call) hinted at a strong back-to-school season in the U.S.

Speaking of which, my five year old daughter picked out a pair of Sketchers for her Kindergarten gym class. She liked them over three or four other pairs because she says they were the most comfortable.

My daughter had been wearing Keens up until now. She was complaining of sore feet and wanted to be carried around all the time. We took her into a podiatrist and found out she has fallen arches. The Keens will be headed to the garbage.

In my opinion no price is too high for a quality shoe.

Best,
–Kevin

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#6

It’s not often that I disagree with Saul but this time I do have a slight difference of opinion about style. I am a bit of a shoe fanatic. Not quite as bad as Imelda Marcos but way too many pairs of shoes. I bought a pair of VERY fashionable trendy dress shoes that looked great at Nordstrom’s Rack. They were also really comfortable. I got them home and was surprised to find they were Sketchers. Didn’t really think they made anything so fashionable.

David

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#7

Saul, I agree with much of what you say. For example, I never ‘wait for a further slump before taking a position’ if I think the price is a good one. But I disagree strongly with the TMF market view (common to all asset-gatherers) which might be summarized thus:

  1. The multiples you see now will be preserved for all time.

  2. The market always bounces back.

Therefore when you say your stocks ‘don’t have a long way to fall if things turn bad’ I respectfully disagree.

When you say of 2008 ‘They all said “Sell out of stocks”’ that is not the case. The people I was watching intently, Andrew Smithers, Grantham, Buffett and others, all said ‘buy’.

I timed the market in 2008-9 and my high cash position served me well, reflected in the annualized returns of the ETF (SPY) I had averaged down into all the way to the bottom. However, I did not think at the time that the market had truly bottomed, nor do I now. The bottom at such times is usually an overshoot to the downside and a market PE in single figures.

‘… no one can forecast the market…’. I believe they can. Professor Shiller’s CAPE does not pretend to predict the market short term, only to provide a long-term reference-point to risk. I understand well the qualifications which apply in these artificial times but still consider it accurate enough. In addition, it is supported by all other serious measures (although not, of course, those used by the asset-gatherers of Wall Street!).

‘Does this feel like a frothy market top?’. Well yes, it does to me. And yes, I am still hearing euphoria.

‘There is no inflation, NO inflation…’. The inflation is expressed in the stockmarket. That is where it is. That is where the euphoria is.

‘Relax and have fun investing.’ I fully intend to!

'I was up… Now…I’m up… Should I have gone into cash to prepare for the correction? You figure it out. Well, my figuring of it out was that hindsight is useless with insurance policies. You may regret that you paid medical insurance but then turned out to be well all year so all that darn money was wasted but that is scarcely the point about insurance.

I completely concur with every one of your thoughts about taking a position quoted from the Knowledgebase.

Finally, may I say this is a most interesting board and I am grateful.

Certain things surprise me however. One is the number of contributors who do no research of their own and do not even spend some serious money on screening services and learn about due diligence. Unaccountably, they wait for other people to come up with ideas.

Many of these people, dangerously, think they are Saul: they are not Saul. They are at great risk; many have abandoned safer portfolios to follow a leader they cannot hope to emulate. I suspect many are naturally risk-averse.

Many appear to have grotesquely concentrated their portfolios in a manner pregnant with risk.

Few know any market history.

The Knowledgebase should contain a financial health warning, probably at the top in bold, on the lines of ‘Do you think you are Saul? I bet you are not! Do not invest my way unless you possess the following characteristics…’.

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#8

But I disagree strongly with the TMF market view (common to all asset-gatherers) which might be summarized thus:

1. The multiples you see now will be preserved for all time.

2. The market always bounces back. – strelna (emphasis added)

I’ve never seen any claim by “the TMF market view” like that of the bolded section. Would you care to back that up?

Everywhere I’ve looked in 50+ years of investing it’s generally recognized that PE average multiples will shrink (gradually or otherwise) as a company matures. To assert otherwise is an extraordinary claim that I’ve not seen supported in the market.

Rob

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#9

I think people might get the idea that Sketchers are some kind of geriatric shoe due to all the post about comfort. For me I bought them because of the large toe box. But they do cover all age brackets.
Check out this very short ad they are running.
https://m.youtube.com/watch?v=A0wcOHOhVU0

Bruce

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#10

strelna,

Others will probably respond more eloquently but I did want to write a few line before heading off to work.

First let me say I have read your posts for years and have often appreciated your contrarian views. However I was quite surprised by several of your statements.

Certain things surprise me however. One is the number of contributors who do no research of their own and do not even spend some serious money on screening services and learn about due diligence. Unaccountably, they wait for other people to come up with ideas.

Many of these people, dangerously, think they are Saul: they are not Saul. They are at great risk; many have abandoned safer portfolios to follow a leader they cannot hope to emulate. I suspect many are naturally risk-averse.

Many appear to have grotesquely concentrated their portfolios in a manner pregnant with risk.

Few know any market history.

First for myself let me say I have been investing (not always well) for more than four decades. I DO have some knowledge about market history.

I have also been following Saul for years and this board since day 1 and have a very different perspective. Some of the smartest, most informed investors populate this board. More seem to find it every day. Although I believe there may be a few who blindly try to emulate Saul’s portfolio, I think the vast majority of us try to stay within our own comfort zone and investment philosophy. I personally have a moderate percentage of my portfolio in Saul type stocks. Some I learned about through other TMF services but find it reassuring to see Saul take a position. For example Tom E. (TMF1000) has been pounding the drum about SKX for years. I looked at the stock and dismissed it multiple times because I never found the numbers that compelling, despite my respect for Tom. I also hated the way the shoes looked (I know that’s a terrible criteria but at least I’m aware of my bias). I finally purchased several lots of SKX when Saul brought it back up here. I looked at the numbers, remembered Tom’s post and decided it was a good investment. Conversely I didn’t buy SEDG. Not sure about the timing for solar and I already had a position in Solar City.

I have never thought I was Saul and (no offense Saul) wouldn’t want to be him despite the fact that I’m quite sure he has much more money than I will ever have. On the other hand even the greenest of investors can learn a lot from Saul and this board. If an investor did nothing else but follow Saul’s sell arguments, that person would be way ahead. I noticed one of the premium TMF services finally got around to recommending a sell on a stock (I would mention the name but don’t want to run afoul of TMF rules and many of you know which one it is)that has now fallen 80% plus since it was first mentioned in 2011. From around $16 per share to about $2.50. Saul got my attention with his well reasoned arguments against this stock on its specific board. His points were accurate and I finally sold my entire position. My point is that there are far worst investment gurus a person could follow. If a new investor had listened to Saul and even acted without ANY due diligence that person would be way ahead.

More than thirty years ago I read in Barron’s about a person named one of the top ten investment managers of the year. As it happened he lived in the same city I was in at the time. He used in dissertation on the movements of sea slugs and chaos theory to develop a market timing approach which seemed brilliant at the time. Plus Barron’s for goodness sake had anointed him. I met him and liked and trusted him. After several years of straight losses we finally pulled our investment from him. Sometimes we have to make our own investment mistake as part of the learning process and I am quite certain following Saul and this board will be highly educational and have a far better outcome than my sea slug inspired manager. As an addition to some of the TMF services, this board is a perfect place to learn the art of better investing.

Rant off.

David

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#11

David. You have been investing for over 4 decades. You saw the 1982 bottom when you could buy almost any company’s stock in the US for 5-8 X reported earnings. You saw it was 1992 before the market reached an inflation-adjusted new high after the secular bear market of 1966-82. You saw the S&P take more than 13 years to make it back to the March 2000 high. You know about 3 decades of dead money in Japan. (You may not know that if you had bought a 20-year Treasury bond in 1966 and rolled it over every year, you would have done better than the S&P through 2008, 42 years.) You know it is 7 years since the last recession and you no doubt wonder how the Fed. will fight it. You know the best documented returns over full market cycles are those of Graham & Dodd type investors. You have a moderate percentage of your portfolio in Saul type stocks; how wise. Clearly you are one of the many well-informed investors here (agreed) to whom my comments are completely irrelevant!

Rob. Market multiple. Inherent in ‘the market always bounces back’ is the corollary: that the PE will soon be restored. See above.

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#12

You saw the 1982 bottom when you could buy almost any company’s stock in the US for 5-8 X reported earnings. You saw it was 1992 before the market reached an inflation-adjusted new high after the secular bear market of 1966-82. You saw the S&P take more than 13 years to make it back to the March 2000 high. You know about 3 decades of dead money in Japan. (You may not know that if you had bought a 20-year Treasury bond in 1966 and rolled it over every year, you would have done better than the S&P through 2008, 42 years.) You know it is 7 years since the last recession and you no doubt wonder how the Fed. will fight it. You know the best documented returns over full market cycles are those of Graham & Dodd type investors.

Why focus so much on “the market”? If we are talking about the S&P 500 then you are looking at an approximation of “the market”. You are essentially looking at sort of an average of changes in the percentage of stock prices. People talk about the market, and thus a version of an average. If you buy an index fund then “the market” may matter. If you are carefully selecting individual companies then “the market” is not very important. Sure there are some macro trends and numbers that may affect many/most stocks/companies, but the FAR more important thing to look at is what is actually happening with the companies in which you are invested. Just because “the market” is growing at 3% doesn’t mean that your companies can’t grow at 30%, 300%, or even 3000%. Even if the economy is shrinking there will be companies that grow by leaps and bounds. When people focus so much on “the market” and on averages they are apt to miss all kinds of opportunities.

People who are here and are following Saul’s approach know that they should spend their effort learning about individual companies and analyzing those companies rather than fretting about the overall “market” is doing.

Chris

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#13

“the market always bounces back”

So far that has been true in the US. But in some cases it took longer than many peoples post-retirement lifetimes. A market pop doesn’t help a lot if you are dead.

“always bounces back” is not the case globally. See Russia 1918 and others.

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#14

then “the market” is not very important.
I can’t find the exact percentage but almost all stocks fall in a Bear musket, even more if it is a bad one like the 1930’s and 2008-2009.

It may be hubris for most of us to think we are so good that all our stocks will be in that tiny percentage that don’t fall. Saul’s stocks fell a lot. Ask him.

“Markets”’ matter . A lot.

Whether you can do anything about them is a different discussion.

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#15

“Markets”’ matter . A lot.

Whether you can do anything about them is a different discussion.

Sure, tide goes in and tide goes out, but these tides are not regular and predictable like the oceans’ tides. So, yes, if you can’t do anything about it then why worry about it. Just accept that the tides movements will move around and accept it. If you try to swim against the tide every time you think it will shift then you will get very exhausted. You can be afraid and go into cash. Or you can try to time the tides, but I argue that trying to “time” “the market” is a fool’s errand. If you want to try to time “the market” then I say it’s your money. If you want to argue about “the market’s” historical stats, I say it’s kind of pointless. Clearly, your opinion is different from mine, and that’s fine.

It may be hubris for most of us to think we are so good that all our stocks will be in that tiny percentage that don’t fall. Saul’s stocks fell a lot. Ask him.

We don’t need ALL of our stocks to go up and do well. If we don’t think we are good enough to beat “the market” maybe we should park our money in index funds or other alternatives. Personally, I think that I can beat “the market”, and I will continue to take that approach. Again, that’s my opinion, and I vote my dollars that way.

Chris

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#16

Rob. Market multiple. – strelna

Ah…

I thought you were making that claim about individual company stocks. So you can understand my response.

Regarding market multiples being constant…. just remember that this is the Motley Fool. Not everyone (in the Fool community or among Fool advisors/contributors/writers/whatever) believes that markets will always recover. Stretch out a long enough timeframe and you can’t even find civilizations that are enduring, let alone markets. :slight_smile:

Rob

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#17

Thanks for your comments all. Winding up my end, I would just say that I am about 70% invested, 50% directly in companies, and I hope I can beat the market. That optimistic position speaks for itself but does not mean I trust the market or think it does not matter very seriously to my investments. Central bankers worldwide have created a tiger we have chosen to ride and I find thinking about the downside unavoidable. In particular, I am not sure what happens when the next recession comes.

But I hope we will all do well!

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#18

…but almost all stocks fall in a Bear musket, even more if it is a bad one like the 1930’s and 2008-2009. It may be hubris for most of us to think we are so good that all our stocks will be in that tiny percentage that don’t fall. Saul’s stocks fell a lot. Ask him.

Hi Mauser, Sure all stocks went down in the 1929 and 2008 Crashes. But please note that it was 80 years between 1929 and 2009, and there was nothing in-between which came anywhere close. It’s not like a total wipeout like that happens every day. A person could have been born, grown up, had a family, gotten old, and died of old age, between those two Crashes and never seen either one of them. Let’s keep it in perspective. We don’t have to look over our shoulder in every correction and imagine it will be another 1929. Corrections happen all the time.

Saul

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#19

SKX shoes seem pervasive in terms of where they are sold and to whom. I bought a pair a couple of years ago and they continue to look good while wearing like iron. My one beef - a big one - is that they are very, very slick in even the dampest of conditions. This is highly surprising given the nature of the shoe (walking shoe with LOTS of tread/lugs). Having already fallen a couple of times when they went out from under me, I don’t intend on buying an SKX in the future (unless there’s some “no skid” or “no slip” tag showing).

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#20

SKX is vulnerable to a catastrophic drop depending on the extent it’s products are a fashion fad vs the extent they are good shoes.

The thing you should consider is that “fashionable” and “good” are not mutually exclusive. It’s completely possible for a single pair of shoes to be both and even more within the realm of possibility for a single company to address people who are primarily driven by fashion and other people who are more driven by comfort and function.

I bought SKX stock before I bought Skechers shoes. It is safe to say that I am pretty well ignorant of current fashion, which is not the same thing as ignorant of good design. My father was a designer, one of the creators of what we now call “mid-century modernism.” I grew up with an ever present awareness of design, and my father’s strongly held opinions of what separated “good” from “bad” design.

I now have two pairs of Skechers shoes. I wear one or the other pair to the exclusion of all other shoes with the occasional exception of sandals. My wife and I walk for about an hour every morning. We both wear Skechers shoes when we walk. They provide good support. They were comfortable when we tried them on in the store, requiring zero “break-in” (the amount of time required to convince yourself that the shoes you purchased are comfortable). They also look good. My other pair of Skechers are my daily walk around shoes. Very comfortable (but don’t provide the same degree of support as the walking shoes). They are timelessly casual fashionable unadorned black slip-on shoes.

Both pairs of shoes were made in China and were very competitively priced. I’ve owned both pairs of shoes for under a year, so it might be premature to discuss how sturdy they are, but so far anyway they show no signs of poor craftsmanship or inferior materials when compared to Cole Hahn, Nike, New Balance and other more expensive shoes I’ve owned. In other words, so far they appear to be a very good value for the price paid.

Skechers offers a wide variety of shoes with appeal to just about every market demographic category you can imagine. I would venture that they have some vulnerability with respect to inventory control. I would also speculate that management is not ignorant of this, after all, if I can see this as a risk factor, the guys who run the company are very likely also aware of it. It would not surprise me to learn that they have developed some proprietary data analytic software that helps them make decisions about when to kill a product and when to market a new one. The thing to be aware of with data analytics is that it’s reliability improves with database growth. The more sophisticated software “learns” with use so decision support improves over time. I don’t know that Skechers utilizes decision support software, but I consider it likely.

Skechers has demonstrated success in the US and Europe and they are aggressively expanding their presence in South America. and other international markets. I would venture that this company has a long and wide runway for future growth. I consider this mundane shoe company my highest confidence investment. I think that the breadth of their product offerings coupled with their geographic diversity pretty well insulates them from vulnerability to a catastrophic drop.

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#21

My wife and I walk for about an hour every morning. We both wear Skechers shoes when we walk. They provide good support. They were comfortable when we tried them on in the store, requiring zero “break-in” (the amount of time required to convince yourself that the shoes you purchased are comfortable). They also look good. My other pair of Skechers are my daily walk around shoes. Very comfortable (but don’t provide the same degree of support as the walking shoes). They are timelessly casual fashionable unadorned black slip-on shoes.

Both pairs of shoes were made in China and were very competitively priced. I’ve owned both pairs of shoes for under a year, so it might be premature to discuss how sturdy they are, but so far anyway they show no signs of poor craftsmanship or inferior materials when compared to Cole Hahn, Nike, New Balance and other more expensive shoes I’ve owned. In other words, so far they appear to be a very good value for the price paid.

I don’t think they will last for 1 year. I bought two pairs, which I use for my daily walks (1 in the morning and one in the evening). It took a few months for the soles to smooth out on the heel part of the shoe. It may be due to how I walk but my Asics which are much older held up much longer and I am back to using my much older Asics over the Sketchers. Will I agree they are comfortable out of the box I don’t find them lasting all that long with my daily usage.

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#22

It took a few months for the soles to smooth out on the heel part of the shoe.
Yeh that build in obsolescence pisses me off. Heel adds on and sole manufacturers deliberately use fast degrading materials. The heel of the sole gives out on my shoes before anything else, every time.
Ant

#23

Ant, shoes do give up the soul! Don’t you guys have cobblers? They heal shoes. LOL

Denny Schlesinger

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