At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the best...
What do you do when one of the best analysts in the business points out a stock that's lost more than half its value in just a few months, and declares (I paraphrase here): "Enough. Stop. It's time to buy?" Personally, I listen up, and from what I hear, "Blue Horseshoe loves Deckers Outdoor (NAS: DECK) ."
"Blue Horseshoe" in this case being ace stockpicker Standpoint Research, ranked in the top 6% of analysts tracked on CAPS. Yesterday Standpoint noted how the steep drop-off in Deckers' share price now has the stock "trading at 2007 levels" despite sporting "one of the highest profit margins" among their footwear industry peers. According to Standpoint, at just 1.35 times trailing sales, Deckers' valuation looks "quite attractive." Attractive enough, in fact, that Standpoint is going to go against the grain and recommend buying the stock... and predicting it will hit $70 within a year.
I only wish I could agree.
Did Standpoint jump the gun?
There are many reasons to believe that Standpoint will be proven right about Deckers. For example, MasterCard (NYS: MA) and Visa (NYS: V) both just finished reporting strong Q1 revenues (up 17% and 15%, respectively, with profits on these revenues up even more strongly). That would indicate shoppers are still spending on consumer goods out there. The U.S. consumer remains a force to be reckoned with.
For another, Standpoint itself boasts a strong record as a footwear industry analyst. Last week, Standpoint recommended buying Deckers rival Crocs (NAS: CROX) after that stock's post-earnings sell-off. As with this week's Deckers endorsement, it was a contrarian call -- but as Standpoint noted in its Crocs write-up, "this is our sixth time [recommending Crocs] in less than three years ... we are 5-for-5 so far." Clearly, this analyst knows its left foot from its right.
I'm just not so sure Standpoint knows Deckers. Indeed, I'm not sure anyone can know how Deckers is doing just yet. As I mentioned last week, at "only 11 times" this year's projected earnings, Deckers looks cheap for the 19% long-term growth that Wall Street is expecting from it. The problem, though, is that Deckers' earnings may not be of particularly high quality.
Last time Deckers filed a cash flow statement, you see, it clearly showed that the company was burning cash at a rapid pace, even as it reported "earnings" profits under GAAP. This could have changed in the most recent quarter... but because Deckers still hasn't deigned to provide investors with a copy of its most recent cash flow statement, no one can be sure the news isn't still bad.
When Standpoint points out that Deckers appears irresistibly cheap at 1.35 times sales therefore (relative to, say, the 1.6 times sales multiple at Crocs , or the even pricier 2.3 times sales at Nike (NYS: NKE) ), be aware: Appearances can be deceiving. Whatever else you might think about them, we know at least that Crocs and Nike are both free-cash-flow-positive companies. Deckers isn't. (Or wasn't, last time we were able to check). Whereas their "profits" are real and verifiable by counting the cash in the bank, Deckers' are not.
While Deckers may be as cheap as it looks, it also may not be anything of the sort. For this reason, investors might be better advised to avoid Deckers for now -- at least until it fesses up and files its complete financials with the SEC -- and invest instead in one of the three great consumer brands identified in the Fool's new free report: "3 American Companies Set to Dominate the World."
At the time thisarticle was published The Motley Fool owns shares of MasterCard.Motley Fool newsletter serviceshave recommended buying shares of Visa, Deckers Outdoor, and Nike, as well as creating a diagonal call position in Nike. Fool contributorRich Smithowns shares of Crocs. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 350 out of more than 180,000 members. The Motley Foolhas adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.