by Serge Berger | March 3, 2014 8:23 am
Footwear and accessories company Deckers Outdoor (DECK) put out something of a mixed bag last week, providing strong earnings but poor guidance for Q1 2014 that delivered a major beating to DECK stock.
After the bell last Thursday, Deckers reported earnings of $4.04 per share of DECK stock to top analyst expectations of $3.77. All in all, EPS were up 46% year-over-year.
However, Deckers forecast an ugly first quarter for the current year — a loss of 16 cents per share vs. the Street consensus of 10 cents. DECK said the decline in profits would come on costs associated with the nearly 30 new stores it opened in the second half of 2013. Furthermore, Deckers now sees revenue rising 6% in the quarter, which is about half of what analysts foresaw.
As a result, DECK stock was knocked down by more than 12% on Friday.
That’s the backward-looking news, which we must keep in the back of our minds when looking at the below charts. But it shouldn’t blind our view from any opportunities that now arise in DECK stock.
DECK stock, like other trader favorites, has a history of rallying too sharply to sustain over any given time period, which more often than not leads to significant mean-reversion moves lower. Take the rally from September 2010 to October 2011, for example. It took DECK stock too steeply higher and removed it from its 2009 uptrend line, and this ultimately led to a much deeper selloff than would have been necessary had Deckers Outdoor reacted calmer on the way up.
The most recent example now is DECK’s rally off the October 2013 lows into the early January 2014 highs, which again had a very steep slope and now is overdue for a mean-reversion move lower.
With last Friday’s 12% selloff, DECK stock sliced through its 50-day (yellow) and 100-day (blue) moving averages, all in one swoop. This now looks to have kicked off a better mean-reversion move lower, which has a natural attraction point at the November 2012 uptrend line (black).
Not so coincidentally, this uptrend line currently also matches up with the 200-day MA (red); both are a little less than 10% lower from last Friday’s close.
For those long Deckers Outdoor, this move should be seen as a reality check. You should still lighten up on holdings (although risk management dictated that this should have been done well before the earnings report, as I often point out in this column).
For more active investors and traders, a short-side trade on DECK stock with a target near $68 and defined risk near $77.20 (100-day MA) could now be setting up.
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Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the Essence of Swing Trading e-book by clicking here. As of this writing, he did not hold a position in any of the aforementioned securities.
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