Investors Are Overlooking a Big Opportunity Here

The stock market is in full panic mode and fear is spreading that the U.S., along with much of Europe, may be heading into another recession. Despite these fears, one sector is cranking out a record volume of product -- the Swiss watchmaking industry.

Automatic profits
Whether you wear something as simple as a Timex or you're sporting a Rolex, chances are you've contributed to the watch revival that began two years ago. Through the first six months of 2009, 11.7 million watches and movements were exported by Swiss watch companies. This figure has ballooned to 17.1 million through the first six months of 2011 -- a record.

More impressively, all watch companies are feeling the benefits. High-end Swiss watch companies such as Richemont Group noted a 33% jump in sales and a 79% rise in profit in its latest annual report. Likewise, LVMH (OTC: LVMUY) reported a 28% rise in sales in its luxury watch segment in the first quarter. Even a move lower on the luxury scale to Movado (NYS: MOV) proves to be a successful venture. The company surprised analysts last quarter by recording a 23% jump in sales and reversing a year-ago operating loss. If you recall as well, Movado was able to recently reinstate its quarterly dividend thanks to these stronger results.

So why investors took yesterday's news from Fossil (NAS: FOSL) as a reason to dump the stock en masse came as a shock to me. Fossil manufacturers and sells fashion watches worldwide. Though it's not based in Switzerland, nor churning out anywhere near the same quality watch as you get from a high-end company, Fossil has benefited from riding the coattails of these aforementioned growth stories.

Yesterday morning Fossil reported a 35% rise in revenue to $556.7 million and a profit of $0.80 per share. This compared with consensus expectations for a profit of $0.75 on revenue of $536.1 million. What really caused the company to tumble as much as 26% intraday was its third-quarter guidance, which signaled that rising costs and a higher effective tax rate were going to take a link or two out of its bottom line. The company forecast third-quarter EPS of $1.00-$1.03 and gross margins of approximately 55%, well below the 57% it reported a year ago. But not all hope is lost.

Ticking higher
Fossil looks poised to benefit from a continually weakening U.S. dollar. Fossil's worldwide same-store sales ticked up by 22% during the second quarter, and the company was able to add $26.9 million in revenue thanks to a weaker dollar. While it's hard to say if the dollar will continue to boost Fossil's figures, it's very hard to find a near-term catalyst that gives me confidence that the dollar is headed higher. So for now, we roll with this trend.

Fossil has also invested more than $343 million in its stock-repurchase program since the second quarter of 2010. By taking 5.2 million shares off the market, Fossil is setting itself up for easier earnings comparisons since fewer shares are outstanding. It also demonstrates to shareholders that Fossil believes its stock is a compelling value at current levels -- and I have to agree.

Time will tell
Now trading at just 15 times 2012 earnings and with gross margin rates that are still well above its decade-long average of 50%-52%, I feel you have to give Fossil a long look here. Fossil has turned a profit in every year for the past decade (despite two recessions), and has actually managed to lower its costs extensively over that time. It makes for a compelling long-term buy and hold -- but only time will tell if I'm right.

What's your take on Fossil? Buy, hold, or sell? Share your thoughts in the comments section below and consider adding Fossil to your watchlist.

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLongThe Motley Fool owns shares of Fossil.Motley Fool newsletter services have recommended buying shares of Fossil. Try any of our Foolish newsletter servicesfree for 30 days.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat never needs a battery.

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