By now investors should know that most Bull Market periods will end with a blow-off rally pushing valuations to unsustainable levels. When reality returns, and the business cycle ends, those stocks that have benefited from the rally tend to fall the hardest.
In April of 2007, Deckers Outdoor (DECK) was added to the buy list of highly rated Louis Navellier’s Emerging Growth. With impressive growth statistics across the board, DECK received mostly A ratings according to Navellier’s PortfolioGrader Pro.
At the time of the recommendation, DECK traded for around $70 per share. Even though the stock had more than doubled in value from its lows, record sales of its TEVA sandals and Ugg boots encouraged bulls to aggressively buy shares.
And buy they did!
Shares of DECK zoomed higher throughout the year touching $166 before the year was out. Not that the appreciation wasn’t justified, but if such action does not typify a blow- off rally, I’m not sure what does. What was more striking for DECK was that such a move defied the trend. Most momentum stories began petering out in October of 2007. With DECK the decline started after the end of the year.
By the end of January, shares of DECK had fallen having stabilized at $120 by the end of February. Is this merely a correction or a sign of things to come? We can find some clues by looking at retail brethren Crocs, Inc. (CROX) and NutriSystem, Inc. (NTRI). Both of those stocks fell hard after releasing earnings that crushed expectations, but fell short on the guidance side of the equation. Such results should not be surprising as every forward looking economic indicator is suggestion consumer weakness and sluggishness. Frankly, I’m surprised the overall carnage has not been worse.
Both CROX and NTRI should have been harbingers for things to come at DECK. (To see what I really think of CROX, see “What a CROX!”) Sure enough, last week DECK followed suit with its 4th quarter earnings results that beat expectations, but left investors wanting more from its first quarter guidance.
The market is currently destructive and it is taking no prisoners. Unfortunately, momentum growth stocks, including DECK, have little room for error. The slightest misstep leaves the potential for a big fall. In my opinion, we have yet to see the full extent of that fall at DECK.There is more downside risk as shares still trade for a very high valuation. No matter how encouraging the growth prospect in the long term, the fact is that economic conditions in the short term are potentially damaging to that future.
So, keep a close eye on Navellier’s PortfolioGrader Pro as we may very well be in the midst of a sharp correction in DECK. As I said above, the higher they climb, the harder they fall!
Jamie Dlugosch
Executive Editor, InvestorPlace
This is an especially good time to join Louis Navellier at Emerging Growth because he’s historically done very well during turbulent markets. In 1991, Louis Navellier’s Emerging Growth Buy List soared over 83%, and he sees many similarities between now and then. You can sign up for a full year of Emerging Growth for $995! Or, if you just want a sample, you can get three months for $295. Join Louis Navellier’s Emerging Growth today!