Thinking about p/e contraction SWKS, LGIH, SKX

Friends,

Monkey has SWKS and LGIH and SKX on his mind. All companies that are growing their revenues, but the market, in response, is lowering the stock price, thereby contracting the p/e multiple.

What are the causes for this?

  1. The market is asinine and doesn’t understand the business properly and patient shareholders will be rewarded because eventually the plethora of bananas will become obvious even to the irrational.

  2. The market isn’t asinine and doesn’t believe the growth matters much because a) the best days are behind it b) there are some other competitive factors that will make the growth irrelevant c) the business itself is somehow fundamentally flawed and current growth and future growth are not correlated in any substantial way.

I can see case 1 being true for all three companies above, in which case, nothing to see here folks, except gobbling up as many banana trees as possible while their seeds are on sale.

But what are the case 2 scenarios? What if the market isn’t being stoopid.

Monkey’s gonna think on some possibilities, with the hope y’all help him out some:

  1. LGIH: p/e will keep going lower and lower and lower no matter how many homes it closes and how much revenue it makes because eventually there will be a downturn in the economy and house sales will plummet. So best not to invest when the inevitable always happens.

Or: maybe the market thinks the best lots and ripest communities have already been constructed and its all uphill from here, with lower margins and the revenue growth will plummet?

Or:???

  1. SWKS: p/e will continue going lower and lower and lower because no matter what, it’s a tech company and tech comes and goes like fashion. And Apple might be going out of fashion. So eventually revenue will dry up.

Or: ???

  1. SKX: p/e will continue going lower and lower and lower because, unlike Nike and UA, Sketchers are just shoes rather than an iconic brand, so there will be little left over when the tide changes.

Obviously these blurbs above are pessimistic and aren’t taking into consideration the bull cases.

But what other thoughts do y’all have about the consistent good performance of the above companies and the consistent contraction of the p/e multiple? What’s the market seeing that we’re not, theoretically?

Puzzled,

Monkey
long SKX, LGIH, SWKS

24 Likes

These are good questions to ask Monkey. I think we all need to do this with our positions on a regular basis to make sure we’re not missing something. Let me humbly answer your question to the best of my ability.

For SWKS and LGIH, I at least understand the bear cases. Mind you, I am not saying I agree with them, just that I kinda see where they’re coming from.

SWKS - The market sees it as closely related to Apple and the smartphone market. The smartphone market is saturated. Upgrade cycles are lengthening, not shortening. SWKS could be designed out of smartphone models.

LGIH - Home building is cyclical. Market is wary of cyclicals (as am I). Nobody wants to be holding the bag when the cycle turns.

Now again, please don’t mistake me, I am not saying I agree with these arguments. I am just trying to articulate what I believe the market is thinking in regards to these companies.

Now for SKX. My largest personal position. And, I gotta tell you, I just don’t get it and I’ve tried looking at it from so many different angles. They killed it last quarter. Killed it. And yet they can’t seem to break $34 without falling back down to the high $20s.

The only thing I can think of is that SKX is being sold off with the rest of the retail and apparel stocks. The entire sector is getting creamed and I think they might just be being sold off with the rest of their sector. That includes Macy’s, Nordstroms, Kohls, Nike, UA, LULU, KORS, COH, KATE, etc. I mean the list of retailers and apparel stocks getting crushed goes on and on.

But I don’t know if I buy this. But its the only semi-logical thing I can think of.

Would welcome anybody else’s thoughts.

Matt
Long SKX, Long SWKS, No position LGIH
MasterCard (MA) and PayPal (PYPL) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

21 Likes

Or…

  1. The market is in bear mode

Denny Schlesinger

8 Likes

Monkey,
First thought I have is that commercial bananas are parthenocarpic, i.e., they do not produce viable seeds. They are propagated via root transplants. In case you weren’t aware, the current primary banana hybrid (Cavendish) is under threat of extinction from a incurable and rapidly spreading fungal disease. The Cavendish replaced the Gros Michel hybrid in the 1950s for exactly the same reason. Problem is, there is so far no acceptable replacement for the Cavendish despite the hundreds of banana species available.

Which all boils down to I hope we aren’t banking on the price of banana seeds. That indeed would be a disaster if we plan to eat any of those bananas.

OK, with that behind us, here are some thoughts -

LGIH: The FED has confirmed (as much as they confirm anything) that we’ll see three or four rate hikes this year. Even before this confirmation, it was widely expected. Although rate hikes indicate that the economy as a whole is improving, they also eat away at LGHI’s prime strategy which is affordability for first time buyers.

SWKS: My theory is not new. I think they are still suffering from guilt by association. The majority of investors don’t know anything about what they do other than supply Apple. Apple is tanking, so SWKS is punished. I think it is temporary. IMO two things will happen to turn this around. One - Apple is down, but not out. iPhone7 is rumored to be a killer, revolutionary product in its class. There was no compelling reason to upgrade to 6, 7 will be different. And that ignores the possibility of any new products in other categories. Two - Eventually it will be painfully obvious that SWKS is more than an Apple supplier.

SKX: I don’t have a theory, could be lack of brand recognition. They are not a Nike or an Under Armor. Maybe skepticism about their penetration in China where many popular western footwear brands already have a significant presence. I dunno.

10 Likes

Monkey,

Humans do this silly thing called meditation. It is kind of hard to explain, but often they focus on their own breathing instead of their bananas. They just focus on their breathing. Breathe in, breathe out. There are no bananas, only breath. Why would they ignore their bananas? Well, they are humans, and they are rather silly.

Now, I like to imagine the whole market as one of these silly humans. It breathes in, and P/E goes up and up and up. It breathes out, and the P/E deflates. The market has a greater lung capacity than a human, so it takes a long time to breathe in, and then a long time to breathe out. I don’t really understand it, but it happens that way.

If you focus on earnings quality and earnings growth of your companies, you just need to hang on until the next breath cycle. Yes, even AAPL and GILD P/Es may rise again.

15 Likes

Hi Monkey,

I own significant shares in all three of these. All three are YTD poor to negative performers.

When will their stock prices “straighten up and fly right” ? I do not know

All I do know is that all three are reporting their next earnings within a week of my next birthday…this means nothing, of course.

I’m sure you have already read Saul’s recent review.

Hoping for the best,

Frank

Monkey floated the bear market theory upstream, but then today punched in “s&p” and “p/e ratio” into the google machine and it spat back “23.7!”

So it looks like we’re not in a bear market, technically speaking, and the only stocks going down are those that Monkey owns, which are the ones making lots of 'naners and growing revenue. And CMG because of bugs.

LGHI: because cyclical and interest rates; ok, maybe, but why aren’t the other home builders going down too? Why is LGIH priced so far below the others, even with better margins and return on capital? Because smaller? Newer? Less trust-worthy? More price-sensitive niche?

SWKS: This company is legitimately misunderstood, odds are. Unless Apple completely implodes and “the internet of things is real” turns out to be unreal, we’ll be fine here. But for the p/e to be this low is kinda bearish for bearishnesses sake.

SKX: If it was only SKX around, then sure, a 16 p/e for shoes might make some kind of sense. But compared to NKE and UA, SKX is dropping for seemingly no good reason, except for the lack of legitimacy of the brand as iconic, probably. And the memory of their implosion a few years back. So if they succeed in growing as they say they will, this is now a real bargain, relatively speaking to NKE and UA.

But in the end, all the really matters is how much profit the companies make, right? When Activision was seeing gobs of bananas and the stock price refused to move for years and years, despite the evidence… that taught Monkey that “all we need is patience.”

Walking the streets at night,

Monkey
long SKX, SWKS, LGIH

8 Likes

LGIH: the market is generally nervous, and particularly about interest
rates. Investors retreat to better known names or exit the field.

SWKS: well-covered here. Cf. recent chart with NVDA for interest. The
market’s darling is someone else.

SKX: a) general retail chaos and uncertainty

b) current focus on UA and NKE, where UA has got unknown athlete A
to advertise its products while NKE has only got unknown athlete
B. Who has SKX got? Probably unknown athlete C, but no-one’s
interested anyway.

c) general perception of SKX as wholesome and nice but not state-
of-the-art modern, trendy and high-tech.

I have a holding in SKX despite its low FCFM.

3 Likes

It occurs to me that there is a demographic angle. As the population ages, older people (who now dress like children including a curious preference for sweaty, throwaway, man-made-fibre plimsolls over good leather shoes) become less interested in whether their footwear sports a tick or a coat-hanger and more interested in price and comfort. This could benefit SKX.

4 Likes

It seems to me like Mr Market is nervous about something and when he’s nervous, he likes to abandon growth stock and go into things like raw materials and bonds. Lets see:

http://www.investopedia.com/markets/etfs/vaw/charts/
http://www.investopedia.com/markets/etfs/agg/charts/

Yup, bonds and materials are up by 10 - 20% growing steadily since January.

Even Berkshire just got into a company that’s sitting on the largest pile of cash (though this might not have been based on expecting any market correction, just their general strategy of buying value stock on the cheap)

The possible reasons for Mr Market’s nervousness have been mentioned before:

  • possible changes in fed rates
  • upcoming elections
  • foreign markets risks - Britain’s upcoming referendum, China’s volatility etc.

This might explain the distrust placed in companies whose services can be postponed in uncertain times (like buying houses or expanding bandwidth).

5 Likes

Thanks Monkey for starting such an interesting discussion. My thoughts are just guesses like everyone else, but here they are:

LGIH - Everyone thinks. “Texas builder. Bound to be hurt by oil crash.” This is totally ignoring that they haven’t been hurt, of course, and they have no worries going forward. From the conference call: Things are not slowing down at LGI Homes! We continue to see strong demand for homeownership across the country. This quarter set the pace for another year of solid growth and strong performance. In 2016, we will continue to expand and execute on our growth plan and we expect to deliver robust year-over-year results.

Another worry is that people will put off home buying due to uncertainty. That may be true for expensive houses, but LGIH presents their houses as “Why rent, when you can have a house of your own for the same monthly payment?” That’s a different proposition. (If interest rates go up, rental rates will also go up, by the way).

Last quarter earnings were up 73%, revenues were up 35%, house prices were up 7%. PE is 9.0 !!! That’s 9.0 !!! What’s the risk? That earnings growth will slow to 50%…40%…30%…25%. They have a PE of 9 for gosh sake!

SKX - Macy’s has declining sales so retail stocks sell off. Funds say “We should lighten our share of retail stocks.” But total retail SALES were up for the quarter. And what really counts: SKX sales were up 27% and earnings were up 70%, and gross margins and operating margins were both up. And their new distribution center in Europe will give them even better margins. Macy’s is down because amazon is eating their lunch; Skechers sells on amazon.

Some quotes from the CC. At no other time in our history have we been stronger! The growing demand for our brand has resulted in record revenues and earnings…and our owned retail sales increased by 23% with a 9.8% comp store sales increase…To meet the increased demand, we are investing in our infrastructure, including improved efficiencies in our European Distribution Center, which allowed us to achieve a record 3 million pairs shipped in a month during February. When we complete our expansion to a million square feet in the June quarter, and with the automation to be fully completed later this year, we expect to be even more efficient

Does that sound like Macy’s, which is talking about cutting back, closing stores,etc?

SWKS - We’ve discussed this at such length that I have nothing to add.

Please remember that these are just my opinions.

Saul

22 Likes

Saul,

My nephew just bought a house in Spring, (North Houston) it was roughly 3000 square feet and cost about 175 k.

My home, while probably newer and nicer in deep East Texas, (read rural with small economic base,) ran 160k to build. It has been my experience that Houston has one of the most value oriented hosing markets in the country, maybe the world. This does not appear to be a by product of a housing glut, rather the confluence of easy to,develop land, essentially subsidized infrustructure for new development, (the contractor pays little for new freeways and such, this isn’t to say that there are no cost to land development, but that they are less than most other areas of the country including even rural and poor Texas.) a low transportation cost for raw and manufactured goods, and a low wage base mainly due to the proximity to Mexico. (It has been my experience that finish work, like concrete finishing, dry wall finishing, painting, and the laying of ceramic tile done by recent Mexican immigrant its is the best in the world.)

Cheers
Qazulight (More to say, but my morning walk calls)

3 Likes

What are the causes for this?

I’ll throw a monkey wrench into this and say that the more an investor analyzes and worries about the always present short-term noise and data, aka Everything Stock Market, the worse an investor will do. The stock market short term is nothing but noise and ephemeral data, and reacting to it will be detrimental to the long term results of a well constructed portfolio. Unless you are near retirement and need the money :slight_smile:

Diversify, allocate according to risk and let time work for you. That is a bit sacrilegious for this board, so apologies for the loud metal clanking noise.

conifer

8 Likes

iPhone7 is rumored to be a killer, revolutionary product in its class. There was no compelling reason to upgrade to 6, 7 will be different.

Yo, Brittle! Since this claim has to do with Apple, it affects Skyworks, however indirectly, though obviously also directly. So in all of the ways.

• Monkey would love any source you could point him to that corroborates any of these revolutionary whispers. So far the jungle here is quiet regarding any coming revolution, though you always have to keep an eye out for the chimpanzees.

• There was every compelling reason in the world to upgrade to 6: the large screens with pent up demand like a banshee having eaten too many mangoes for breakfast. And flatter. So this statement feels off, mmmmiright?

In conjectural fact, Monkey worries that the exact inverse is true: 6 was the killer upgrade, and 7 will be, like, a little faster, a little a this, a little a dat, and not revolutionary in the least. And if that’s the case, then Skyworks might in fact feel a little more revenue pressure than surmised and the p/e might stay compressed for a good while yet, unless the Internet of Thingamabobbers starts showing growth in the real world rather than in futurist propaganda. So any and all evidence to the contrary would be supremely welcome, Brittle. Or any other Apple mystics in-the-know on this board, growl your truth!

Humbly,

Monkey
long SWKS

6 Likes

Bother!

Monkey forgot to add a useful link to what we know about iPhone 7:

http://www.macrumors.com/roundup/iphone-7/

Nothing here sounds even close to revolutionary. Maybe SWKS will in fact see lighter revenue growth because there will be fewer upgrades. This seems actually plausible.

So here’s to everything else that Skyworks is in… or Bust!

Monkey

2 Likes

I’ll throw a monkey wrench into this and say that the more an investor analyzes and worries about the always present short-term noise and data, aka Everything Stock Market, the worse an investor will do. The stock market short term is nothing but noise and ephemeral data, and reacting to it will be detrimental to the long term results of a well constructed portfolio.

Although I enjoyed the wit in your post, conifer, I think this is oversimplifying things a bit. Most of us here on Saul’s board are focused on putting our money behind the companies we are most confident in and that we feel have the highest potential. These are not “short term plays” or “trades” that we plan to get in and out of to make a couple bucks, so in a way they are very long term. I have been accumulating SKX because I’ve become more and more convinced that their advantage is growing and growing, and I plan to hold them for years. However, if short term factors are causing the stock to drop, I want to understand them. I AT LEAST want to be aware of them after the fact – I will probably buy more of the stock.

Speaking of SKX, I liked their report so much that I bought more around $33. The last couple weeks it has retreated, down to $29-something yesterday. What am I to do? Nothing has changed about the company. But I need to understand what is happening (the “short-term” factors) to be confident of this. Call it paranoia, call it skepticism, but I think there are people out there with inside info, people who know more than I do about certain things. If they know something I don’t about SKX, I need to ask the types of questions Monkey is asking, short-term focused though they may be.

All that said, I’m convinced the short-term struggles at SKX are just a bit of irrationality. Like Saul said, perhaps the retail drama of late has just caused some fund managers to reduce their position. AKA people are selling SKX for short-term reasons. So what did I do? I added to my position yesterday.

Real quick for Monkey and others:

LGIH – this is patently more volatile because of its size, but with the way it’s growing, maybe not for long. Anyway, I think the lack of faith the market seems to have is a combo of:

  1. fleeing to “safety” in bigger companies
  2. fleeing to safety in non-cyclicals
  3. fears about interest rates
  4. fears about Houston
  5. fears about housing

I think all of these are mostly just irrationality, and I’ve been planning to add to my position, which I may do today.

SWKS - I actually sold my shares. I’ve never felt as strongly about SWKS as others on this board, because they’re not projecting wild growth like many of “our stocks” (“Saul stocks” – SKX and LGIH, for example). Maybe in the long run that changes, but I am just not seeing the “reward” side of the risk/reward trade off. I could be dead wrong, but SWKS is just not for me right now.

5 Likes

Monkey,
I do not recall exactly where I read it (may have been a Flipboard article) iPhone7 will have all glass face with no home button. Apple has entered patents for fingerprint reading technology through the glass (actually, three different methods). The entire face of the phone would be available as a display area for photo/video display (or any other display).

The phone is also likely to be still thinner (there was no mention of the camera wart, I don’t know how they could internalize that and still make a thinner phone). Some change to the bezel which I did not pay attention to.

I don’t recall if any other enhancements were referenced, but it makes little difference. An iPhone with no home button would clearly scream that it was the latest, coolest phone. People who upgrade because it makes a statement (a large segment) would feel compelled to buy this phone, not just the latest, greatest Apple product, but the latest, greatest of any phone. With patent protection on the fingerprint technology, it will be hard for a competitor (Samsung) to imitate.

With patent protection on the fingerprint technology, it will be hard for a competitor (Samsung) to imitate.

My LG G4 has no home button. The bezel is a little wider at the bottom, possibly to accommodate the logo, but no buttons on the face whatsoever.

I do not know what a ‘well-constructed portfolio’ is, only that Chinese debt will one day make mincemeat of it.

Bets are on the fall.
That’s when it hits a wall.

1 Like

iPhone7 will have all glass face with no home button

I’m sorry I don’t have a link (or the time to find it), but I read the all glass, no home button upgrade is the year AFTER the 7, that they were going to go straight from the 7 to the 8, skip the 7s, and do the “major” redesign on the 8 (2017)…potentially delaying upgrades another year. Note, this is just from my memory, which is faulty at times.

For me, the bluetooth true wireless earbuds are what I want.