The Bull Market in Ugly Shoes

11/29/2010 9:28 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer's Investment Research writes that rallying shares of Deckers Outdoor, the makers of Ugg boots, have bears on the run.  

While fashion can be hard to predict, CNNMoney.com ("UGG-ly shoes. Pretty profits," Nov. 22, 2010) argues that Deckers Outdoor (Nasdaq: DECK) is far from experiencing the same kind of consumer backlash that once plagued Crocs (Nasdaq: CROX).

For instance, the company's fundamentals point toward an average 30% year-over-year increase in earnings for the past five years, the author states. What's more, analysts are predicting another rise of 24% annually "over the next few years."

Outside the fundamental realm, analysts are backing the shares, while short sellers are backing away. For instance, Sam Poser, an analyst with Sterne, Agee & Leach in New York, told CNNMoney that investors should "no longer dismiss Deckers and the UGG brand as mere footwear fashion fads." What's more, the company's short-to-float ratio has fallen from between 15% to 20% a few years ago to about 8% currently.

The article concludes by stating that while many still believe that "UGG is a fashion faux pas" and that the shoes are "unattractive footwear," there is nothing unattractive about DECK shares.

Contrarian Takeaway:
While it's hard to argue with CNNMoney.com's fundamental analysis of DECK, the article's sentiment indicators could use a bit more perspective. For instance, short interest currently accounts for about 8% of the stock's total float, but only following a rise of nearly 12% in the number of shorted shares during the most recent reporting period. What's more, while there are bullish analysts in DECK's corner, Zacks reports that seven of the 14 brokerage firms following the stock still rate it a "Hold."

As contrarian investors know, rising pessimism on an outperforming stock is a recipe for additional gains. For instance, the stock's ratings backdrop leaves ample room for additional upgrades or initiations, such as the recent "Buy" rating and $75 price target from Jefferies. Furthermore, as the stock continues to rally, short sellers could be forced to reconsider their bearish bets, and an 8% short-to-float ratio could provide more than enough fuel for a potential short-covering rally.

Finally, it should be noted that DECK recently rallied to a fresh all-time high. [Shares were trading above $72 Monday, having set another 52-week peak near $74 earlier in the day—Editor.] The stock has soared more than 100% since the start of 2010, and has outperformed the Standard & Poor's 500 Index by more than 30%, on a relative-strength basis, during the past 60 trading days. Short-term traders may want to be wary of a consolidation period following recent gains, as DECK waits for support in the form of its 10-day and 20-day moving averages to catch up.

[For more on Deckers, see Vahan Janjigian's recommendation from February 2009, when the stock fetched less than $20, on a split-adjusted basis—Editor.]

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