Michael Kors Is in a Dangerous Position

The Stock of This Once High Flying Company Has Many Challenges Ahead.

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The stock of Michael Kors company is in a tough spot.

Even if you are a fashion challenged male like yours truly, you probably have a more stylish and hip women in your life.  And if you've paid just passing attention to what she wears and accessorizes with, chances are you've noticed a number of Michael Kors items.

The company, which trades under the symbol KORS, first came to the attention of the investing public with its IPO in 2014, which at the time was largest ever in the fashion industry.

After that the stock went on a tear, at one point quadrupling its IPO price.  But lately things have not been so good for this icon of fashion, and the stock has dropped almost 25% from its highs.

The problem is not in the numbers. KORS recently beat analyst expectations on both earnings and revenue, coming in at $0.91 and $919.2 million respectively.  Total revenues were up $43.4% and gross margins ticked up to 62.2% from 62.0%.

And in fact, according to the press release accompanying the earnings, overseas numbers look even better;

"In Europe, we were extremely pleased with our revenue growth of 128%, which was driven by a comparable store sales increase of 54.2%, as well as strength in our wholesale business. Lastly, revenue in Japan increased 89%, driven by comparable store sales growth of 48.8%.”

So what then has caused the stock to take such a hit?  Valuation.

As a trader or investor, it is important to know what stage a stock is in so you can better construct a strategy to profit from it.

 

KORS now exists in that always challenging transition period between being a momentum stock and a value stock.  It is a particularly tough spot to be in because momentum investors tend to push a stock up based not on its fundamentals, but on price and the speed in which they think that price can accelerate.

Problem is, once they decide -- for whatever reason -- that momentum is slowing in a stock, they begin to bail en masse, causing the type of drop we've seen recently in KORS.  And because the stock price has been driven past any reasonable valuation, there are no investors, at least in the short-term, that are willing to come in and support the stock.

With a company that is healthy and growing company like Michael Kors, with time, earnings should grow to the point where they justify price, and longer-term buys will come in.  However, if earnings should falter, the stock price will keep dropping until such a point that it comes into equilibrium.

The same thing has just happened to another stock in the fashion space, Kate Spade -- which trades under the symbol KATE -- a brand started by Kate and Andy Spade, who happens to be the brother of comedian David Spade.  However, the difference between KORS and KATE is that the later dropped 25% in one day after announcing better than expected earnings.

Once again, the problem is one of momentum.  The earnings pace has not kept up with the rate at which short-term traders have pushed the stock price.  It now too moves into that limbo land of no longer being a momentum player, but not yet an attractive value stock.

 

Photo Credit: Javier Fernández/Moment/Getty Images