Which Apparel Company’s CEO Just Bought 10,000 Shares?

Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Angel Martinez, CEO of Deckers Outdoor (NASDAQ: DECK), disclosed through a Form 4 filing that he had purchased 10,000 shares of DECK through a 10b5-1 trading plan on Wednesday at an average price of $45.90. Martinez has known which way his company’s stock was going in the past. Between May 2011 and January 2012, he sold heavily at prices ranging from $85 to $112.68. Today the stock price stands at about $47 after losing 40% so far this year and nearly 50% since his first insider sale in May 2011. The fact that Martinez is now buying back into the stock (and spending nearly half a million dollars in doing so) indicates that he believes the company’s prospects are improving and that the share price is about to bounce back. There has not been much other insider activity in DECK recently - a few minor purchases totaling 2,800 shares so far this year, and no insider sales.

Some hedge funds bought aggressively into DECK in the first quarter of the year, and, with the continued fall in the stock price since then, investors have an opportunity to join the CEO in buying more cheaply. Two Tiger cubs, Chase Coleman at Tiger Global Management and Patrick McCormack at Tiger Consumer Management, initiated large positions in the first three months of the year. Coleman bought nearly 1.9 million shares and McCormack bought just over 500,000. In both cases these positions represent between 1.5% and 2% of their 13F portfolio, so even at higher prices these hedge fund managers thought DECK was a buy. Billionaire Israel Englander, Doug Silverman, and Christian Leone are among the other hedge fund managers who got bullish about the stock (see Israel Englander's new picks).

Deckers is the company behind several mid-to-high end consumer apparel brands with an emphasis on footwear, most notably UGG and Teva. As a result of the falling stock price, the company looks quite cheap on a trailing basis with a P/E of under 10 and an enterprise value of 5.2x EBITDA. However, the company’s fundamentals have struggled recently; while revenue in the first quarter of 2012 beat Q1 2011 by about 20%, margins collapsed, leading to a nearly 60% decline in net income. Income decreased in both the UGG and Teva brands, in addition to an increase in overhead costs, and these reductions were only partly offset by income from Deckers’s new Sanuk brand of flip-flops and sandals.

The market leader in the footwear business, Nike (NYSE: NKE), holds a much larger market cap of $43 billion than DECK’s $1.8 billion. NKE trades at a P/E of about 20, twice that of DECK, and an EBITDA multiple of 11.2. Nike has also experienced a combination of revenue growth and margin contraction, leading to a fall in net income recently, but not on as dramatic a scale as DECK. As a result, Nike is only off about 5% in value so far this year. Another peer, Wolverine Worldwide (NYSE: WWW), is roughly the same size as Deckers at a market cap of $2 billion but trades at multiples closer to Nike (P/E of 18, EBITDA multiple of 11.2). Like the other two companies, its revenue was up in the first quarter of 2012 compared to 2011, but its net income was down. Its stock price has generally tracked Nike’s, but recently the two diverged, leaving WWW up 18% on the year. With such close peers trading at much higher multiples and insider buying serving as a potential bullish indicator, investors may want to pair a long position in DECK with a short position in NKE or WWW on the theory that the valuations of the companies will converge, if they (like the company’s CEO) expect the decline in Deckers’s brands to reverse.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Nike. Motley Fool newsletter services recommend Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus

Compare Brokers

Fool Disclosure