Whose Stock Will Tick Up More?

By Chad Henage - June 25, 2012 | Tickers: FOSL, KORS, MOV | 0 Comments

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I'm always on the “watch” for articles about stocks being shorted. Part of the reason is my contrarian nature -- I don't see the point of shorting a stock when the most you can make is 100%. On a traditional long position there is no limit to how much you can make. To me this makes shorting a stock a sucker's bet.

Sean Williams of The Motley Fool does a good job updating the community on stocks that have seen an increase in short interest. In a recent article, he pointed out that Movado Group (NYSE: MOV) saw an increase in short interest of nearly 66% at the end of May. The amazing part is, as Sean points out, Movado as well as competitor Michael Kors (NYSE: KORS) have both strong demand and pricing power. In my opinion he's right to say this is a dangerous combination to short. However, my first thought was, which of these two companies is the better buy?

Just to clarify, it's a decent bet that Movado is being shorted in response to some perceived weakness in other companies. Fossil (NASDAQ: FOSL) is the company that jumps to my mind. I think the market severely over-reacted to Fossil's guidance of just slightly lower EPS for the full year. However, that doesn't stop short-sighted traders from shorting companies in the same industry. I personally own Fossil and have been impressed by this company's profitability and cash flow generation. I'm assuming that Movado and Michael Kors will show some of the same characteristics. Let's look first at how the market values each of these stocks:

You can see there is a huge difference in expected growth rates between the two companies. Michael Kors does sell for a higher P/E ratio, but the company's much higher expected growth rate makes up for this somewhat. With the lower PEG, it seems like Michael Kors could be the better value. (Michael Kors – 2, Movado – 1)

One part of trying to predict if a company will meet earnings estimates in the future is looking at how the company has done in the past. While history isn't a perfect predictor, it can act as a guide. If a company consistently beats earnings estimates, it seems likely the company will at least meet estimates in the future. While Michael Kors has a shorter streak of beating estimates than Movado, the latter has the better record. Movado has beaten estimates in all of the last four quarters, and more impressive is their average beat comes in at over 100% per quarter. Michael Kors has an impressive record in a shorter time-frame and has beaten estimates by nearly 80% per quarter. With a longer track record, and a higher average beat of estimates, Movado wins this one. (Michael Kors – 1, Movado – 2)

Some investors have wondered if there is a “dividend bubble” in today's market. I believe that yield is being chased in some cases, but this seems segment-specific and not connected to all parts of the market. It is really simple why dividends are in style. When the market is as volatile as it has been in the last few years, these dividend checks help investors to see some returns. This category is very simple -- Movado has a dividend, Michael Kors does not. Though Movado's 0.79% yield won't impress many people, it is better than nothing. (Michael Kors – 1, Movado – 2)

When it comes to paying a dividend, or being able to reward shareholders through buybacks, the measure I like to look at is free cash flow. For companies in the same industry, I compare free cash flow per $1 of assets. This allows me to compare companies of different sizes with an apples-to-apples comparison. This is a category that Movado wins by a landslide. The company generated $0.17 of free cash flow per $1 of assets over the last year. By comparison, Michael Kors only generated $0.04 of free cash flow by this same measure. While it's possible that the company is investing more for future growth, this huge difference in free cash flow generation makes Movado the better option. (Michael Kors – 1, Movado – 2)

The last measure I like to compare between companies is the relative strength of their balance sheets. This category is a tie. Neither Michael Kors nor Movado carry any long-term debt. (Michael Kors – 1, Movado – 1)

The final score is Michael Kors – 6 and Movado – 8. This would probably surprise most investors given the higher growth rate at Michael Kors and the short interest at Movado. I'm willing to bet that short sellers are watching Movado's P/E ratio, and they may not realize how much free cash flow the company generates.

If you are choosing between these two companies, Movado seems to have the better overall metrics. Do you agree with the scores? Let me know what you think in the comments section at the bottom of this post.

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