Walk A Mile in This Stock

10/18/2012 10:34 am EST


John Reese

Founder and CEO, Validea.com And Validea Capital Management

Here is a value–inspired consumer stock that is pulling itself by the bootstraps in these tough economic times and reasserting its quality, writes John Reese of Validea Hot List.

Georgia–based Deckers Outdoor (DECK) makes footwear and accessories, including the UGG and Teva brands. It has a market cap of $1.3 billion.

Deckers' shares have been hammered over the past 11 months, falling about 70%, as questions about the UGG brand's future prospects, negative analyst reports, and increasing inventory have all hurt the stock.

But my Benjamin Graham–inspired model think it's been hit much too hard. In fact, it scores a 100% rating on this investment screen.

First, DECK is neither a technology nor financial company, and therefore this methodology is applicable. The investor must also select companies of "adequate size." This includes companies with annual sales greater than $340 million. DECK's sales of $1.439 billion, based on trailing 12–month sales, pass this test.

The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. DECK's current ratio of 2.74 passes the test.

For industrial companies, long–term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization.

Companies must increase their EPS by at least 30% over a ten–year period and EPS must not have been negative for any year within the last five years. Companies with this type of growth tend to be financially secure and have proven themselves over time. DECK's EPS growth over that period of 3,447.1% passes the EPS growth test.

The price–to–earnings (P/E) ratio, based on the greater of the current P/E or the P/E using average earnings over the last three fiscal years, must be "moderate," which this methodology states is not greater than 15. Stocks with moderate P/Es are more defensive by nature. DECK's P/E of 9 (using the three–year P/E) passes this test.

The price–to–book ratio must also be reasonable. That is, the price–to–book multiplied by P/E cannot be greater than 22. DECK's price–to–book ratio is 1.87, while the P/E is 9. DECK passes the price–to–book test.

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Related Reading:

One Retailer on the Rise

A Pioneer Is Back in the Game

5 Stocks for a Still–Slow Economy

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