Michael Kors: Dressed for Success
05/18/2017 2:50 am EST
In his Validea newsletter, John Reese assesses stocks based on the investment strategies of legendary investors. Here, he looks at a stock that earns a 100% ranking based on the growth strategy of Peter Lynch.
Michael Kors Holdings Limited (KORS) is a designer, marketer, distributor and retailer of branded women's apparel and accessories and men's apparel.
Incidentally, the stock also passes the tests of my strategies based on Joel Greenblatt, Kenneth Fisher, Benjamin Graham and David Dreman.
Under the Lynch methodology, KORS would be considered a "fast-grower". Below are some of the other metric's used in this investing strategy"
P/E/GROWTH RATIO: PASS
The investor should examine the P/E (8.51) relative to the growth rate (52.21%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company.
This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for KORS (0.16) is very favorable.
SALES AND P/E RATIO: PASS
For companies with sales greater than $1 billion, the Peter Lynch growth methodology likes to see that the P/E ratio remain below 40.
Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. KORS, whose sales are $4. billion, needs to have a P/E below 40 to pass this criterion. KORS's P/E of (8.51) is considered acceptable.
INVENTORY TO SALES: PASS
When inventories increase faster than sales, it is a red flag. However an increase of up to 5% is considered bearable if all other ratios appear attractive.
Inventory to sales for KORS was 11.89% last year, while for this year it is 11.60%. Since inventory to sales has decreased from last year by -0.29%, KORS passes this test.
TOTAL DEBT/EQUITY RATIO: PASS
This methodology would consider the Debt/Equity ratio for KORS (7.98%) to be exceptionally low (equity is at least ten times debt). This ratio is one quick way to determine the financial strength of the company.