The Coach Sale Won't Last Forever!

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

Investing can sometimes seem like a daunting task.  What should I buy, and when should I buy it?  Yet, when most of us are at the grocery store, or out shopping for clothes, we can always spot a deal.  In fact, nothing is better than finding that particular item on sale that you have had your eye on for months.  And that brings us to a company that is currently on sale, and one that you should consider adding to your portfolio, Coach (NYSE: COH).

Coach is mostly known for being the first handbag in the arsenal of any aspiring fashionista.  Coach has been in existence since 1941 and boasts over 500 stores in the US and Canada, along with over 300 locations in China, Japan, Singapore, and Taiwan.  To put it simply, Coach is an established company with significant brand power and the Coach handbag is a right of passage for young women.

What everyone else is saying

Last quarter Coach disappointed Wall Street analysts because North American store sales were subpar and revenue growth was paltry.  In comparison, Michael Kors (NYSE: KORS) has been the darling of the ball of late as the stock continues to soar and sales impress.  Also nipping at the heels of Coach are hip designers Kate Spade and Tory Burch.  Coach is old, boring, and on the way out.

Not so fast

Once upon a time, Howard Marks wrote a memo to his Oaktree clients entitled "Ditto."  In it, he outlined what it takes to be a contrarian.  According to Marks, the successful contrarian investor sees what others are doing, understands why they are wrong, is able to sense intrinsic value, and buys when others are selling.  So, let us apply this wisdom to Coach.

We already tackled what others are doing.  Share prices of Coach are hovering around 52-week lows because investors have been quick to dump the company due to sleek new competition and a bit of a hiccup in the performance of the company.

Are these investors wrong?  I believe they are.  While Michael Kors is incredibly hot right now, I still believe that Coach is a brand with staying power.  Coach is only a quarter away from posting numbers that the analysts will like and all of sudden Wall Street will fall in love again.

Buying Coach now is a textbook value play.  You can get a premium company near its 52-week low with a P/E of 12.91 and a dividend yield of 2.5% - how pretty is that?  Compared to Michael Kors, this is a five-finger discount.  Kors is near its 52-week high with a P/E of 34.65 and not a single penny given back to shareholders.  The value here is clear, would you rather buy a Coach bag on sale or pay a premium for Michael Kors?

Alas, there’s the rub

The money is flowing into Michael Kors while investors shy away from Coach.  Even though Wall Street sentiment is against Coach, I believe there is too much value here to pass up, both as a company and in the stock price.  Coach is a long-term contrarian’s dream.  Do not worry about looking bad in the short term; if the stock price continues to fall, I recommend buying more.  Believe in the company, enjoy the dividend, and wait for the stock to rise as generations of women continue the tradition of buying their very own Coach handbag.  As Don Yacktman says, wait to buy great companies when they’re down and then ride them until they recover.


LFCfool55 owns share of Coach. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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