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Here’s the Perfect Risk-Reward Trade for Guess?, Inc.

GES stock - Here’s the Perfect Risk-Reward Trade for Guess?, Inc.

Source: Shutterstock

Retail has been a mess in 2017, but the sector has been surprisingly strong this quarter. As a result, it’s got us snooping around the sector and looking for plays. Luckily, we’ve got a good one with Guess?, Inc. (NYSE:GES), as GES stock has an attractive risk/reward.

Why is retail doing so much better? Perhaps it’s on the realization that Amazon.com, Inc. (NASDAQ:AMZN) isn’t completely taking over the world. Maybe it’s on the better-than-expected holiday numbers so far. It could be that investors are realizing how well the economy continues to do. Or all three may be combining to help.

What’s To Like About Guess Stock?

There’s a lot to like here, so let’s start with the earnings. In 2011, Guess had earnings in excess of $3 per share and its share price was at almost $50. Fast forward to this year (fiscal 2018) and GES stock is trading at $15.90 while earnings are forecast to come in at 62 cents per share. Just because retailers didn’t go bankrupt, doesn’t mean they didn’t feel the pinch over the last few years.

 

But it gets better for Guess. Earnings for this year — which we’re three quarters of the way through — call for 40% growth. Next year’s estimates call for a further 30% gain to 81 cents per share. This annual growth rate of roughly 35% is pretty impressive, as is the revenue growth. Analysts expect sales to grow 6.1% this year and 4.8% the following year. It’s not software sales, but mid-single-digit (MSD) growth is impressive for a traditional retailer in this environment.

Taking matters further is the valuation. GES stock trades at 19.6 times forward earnings estimates. It’s not necessarily cheap, but for MSD revenue growth and 30% to 40% earnings growth, we could do a lot worse. For instance, we recently found Gap Inc (NYSE:GPS) to be attractive, but not until a pullback. (Here’s the level to buy at.)

We also have a make-or-break trade developing in Abercrombie & Fitch Co. (NYSE:ANF) as well, for those looking at other setups in the sector.

Trading GES Stock

Here’s a three-year weekly chart of Guess stock. As you can see, the $15 level has been a fairly significant level. Mostly serving as support, this level will hopefully come into play once more with GES stock. Currently trading under $16, a further pullback to this level should be on investors’ radar.

Chart of GES stock price
Click to Enlarge
Source: Chart courtesy of StockCharts.com

If Guess stock declines to $15, investors should consider a long position. It’s a limited risk/reward in doing so. If $15 holds, then a bounce back to $18 — a recent high in November — is in the cards. That’s good for a 20% return if that plan plays out. Conversely, if $15 fails, investors can cut their losses — say with a stop-loss at $14.50 — and escape the position with minimal losses.

The GES stock dividend further improves investors’ risk/reward. GES stock currently yields about 5.65%, a pretty good payout by most accounts. If investors buy now, they can begin capturing that dividend payment — although on December 12, Guess stock did trade ex-dividend, unfortunately).

However, I find it more attractive to be a buyer near $15. The reasoning is simple. Not only do we have a more favorable risk/reward scenario that could result in a 20% reward vs. a 3.3% risk, but the GES stock dividend yield would be up to 6%.

Buying now would open us up to lower reward, higher risk and a lower dividend. On the flip side, waiting to buy GES stock could cost us our chance to do so, if it fails to decline toward $15. However, it’s an opportunity risk I can live with.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Kenwell did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/perfect-risk-reward-trade-guess-inc-ges-stock/.

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