A few years back, I made Deckers Outdoor (DECK) one of my top Rational Investor model portfolio selections.
Back then, we were buying at just below $30 a share as the company was struggling with a maturing Teva brand while still developing the now-popular and ultra-trendy Ugg boot. With a little help from an Oprah Winfrey endorsement of its furry little boot, DECK stock took off. By the end of 2007, shares crossed the $160 mark.
As the stock starts to retrace its steps back to $115, the question I’m asking today is: Will the company continue to depreciate given the weakness in this economy?
Indeed, DECK is trading lower, but on a relative basis shares are performing much better than its main competitor, Crocs (CROX). The rubber sandal maker has lost a whopping 90% of its value just this year as compared with the 30% loss for DECK.
Time to Do the Math
But something still just doesn’t add up here.
Both companies are remarkably similar and operate in the very weak retail industry, yet current financial performance has been perceived very differently by the market.
DECK does half the revenue (approximately $500 million) as compared to CROX, and yet its market cap of $1.5 billion is 3 times as large as CROX’s.
So what gives?
It may be that CROX has been steadily lowering its earnings expectations to a point where it now simply expects to break even. More likely though is that such a deviation is an example of inefficient pricing.
While the market reaction to CROX is overdone, I am quite worried about the ghosts that may be lurking around the corner for DECK (read, “Clear the Deck!“). Retail operating conditions are what they are, and both companies play in the same field. And yes, while it may be that the inefficiency is weighted to the CROX devaluation, I still think the market is overvaluing DECK at the moment given the risk for performance shortfalls.
If you currently own Deckers Outdoor, it may be a good time to hedge your bets with some options to protect against any slippery downside. If you are looking for an entry point, wait until we see something south of $80 per share. For a list of bargain-basement stocks that you’ll want to add to your portfolio before the summer is over, read “Retail Steals for Summer Profits.”
So far, DECK has been able to navigate the economic slowdown, but the risk for a misstep is simply too high for now.
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