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Earnings Bonanza: Recognizing Long-Term Opportunities in a Market Sell-off

From: James Cramer
Sent: Friday, October 28, 2011 4:57 AM
To: Nicole Urken
Subject: Need

Packet on DECK. Pls send

Nicole Urken, Mad Money Research Director

From: Nicole Urken
Sent: Friday, October 28, 2011 6:45 AM
To: James Cramer
Subject: RE: Need

Conf call and notes are attached. Benefits of European transition showing, domestic wholesale & retail growth, conservative guide = typical

The above email dialogue above doesn’t, on its own, reveal much about the behind-the-scenes of "Mad Money" segment preparation. But I chose to include it because it is one of hundreds of its kind that are exchanged—particularly during earnings season.

Each morning, often starting before 5am, Jim emails out ideas of trends he is looking at in the day ahead or musings from earnings reports the night before. In addition to sending news items, conference calls and research round-ups, we look at analyst upgrades/downgrades of sectors or companies that may be moving stocks during the day. While key for the news elements of "Squawk on the Street," it is vital for framing the investment views of "Mad Money" in the evenings.

Case in point: Deckers , which reported last Thursday after the close. As always, it’s not enough to know the headline numbers and the fact that the stock went up on the report. Nor is it enough to know what the company does and what trends have been in the past. Why? Because every quarter, trends change, and it’s key to be on top of those changes to be ahead of other investors … and ahead of the market. That means going through the company conference call, and reviewing what the research analysts are saying about the quarter.

Why bring this up on a day when volatility is spiking and the headlines are dominated by Greece? Why does this even matter? Because it is precisely a day like Tuesday when macro trends are dominating the market, that it is especially crucial to be reminded of the importance of daily homework. It is this homework, and this homework only, that will allow you to identify “best of breed” names that are well-positioned for multi-year growth that you can buy on a macro-related sell-off.

Deckers, the subject of the email exchange above and one of the names that we looked at in depth after it reported, is one of those names.

Now, Deckers has been a name we have been behind consistently on "Mad Money"—Jim first recommended the stock back in November 2006 after it was named one of Oprah’s “favorite things” (The O factor!). Deckers has more recently won the place as our favorite “junior growth” name based on its large market opportunity … a la Lululemon, Under Armour and Columbia Sportswear —all names under $7bn market cap which much run room, particularly when you look at behemoths like Nike with over $40bn market cap.

So, why, with the stock over $100, does upside remain? Deckers’ main brand, Ugg (which comprises about 90 percent of the company’s revenues), has several years of growth ahead given strong customer reception that is driven by strength in its classic boot along with diversification to new designs, new categories (slippers, casual shoes) and new customer base (from core women to kids and men—with Tom Brady as a major spokesperson). Plus, the company’s Teva brand has seen a strong turnaround as it has repositioned itself to attract a younger, more active consumer with styles that apply year-round.

Above all else, Deckers has a huge runway of international growth. Importantly, the company’s status as a vendor will allow it to grow quickly. As the majority of its revenues are through department stores, they have less overhead expenses and infrastructure associated with setting up new stores and can more quickly expand via department stores. And importantly, the company’s conversion of its European distribution to direct business is an accretive move that will boost margins in addition to roll out of more retail locations.

The degree of the growth opportunity is only topped off by the company’s status as a “lifestyle brand” which warrants a higher multiple. In other words, the brand is less driven by fashion hits or misses but instead reflects a particular way of being. Uggs, unlike Skechers, are the opposite of a fad—and that is key to knowing this isn’t a burn-out name. The full-price sell through on Uggs will remain, and pricing power is key for success, as we’ve seen from the likes of Ralph Lauren .

As high-multiple stocks are getting a bad rep these days, Deckers is a momentum name with much run room ahead and one that will continue to surge. Days like Tuesday are opportunities to “nibble” off on high quality stories that have reported recent strong quarters like Deckers. Other well-positioned vendors that we’ve continued to push on Mad Money? PVH Group and VF Corp which benefit from a growth across a range of categories … and both are seeing continued benefit from their respective acquisitions of Tommy Hilfiger and Timberland.

The bottom line: Don’t give up on your homework, we do our homework every day on "Mad Money." It is the reading of conference calls that will differentiate the strong quarters from the weak … key for being able to buy into an opportunity during a market sell-off.

Symbol
Price
 
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COLM
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DECK
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LLL
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NKE
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PVH
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RL
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UA
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VFC
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"Inside the Madness" appears Tuesdays and Thursdays at madmoney.cnbc.com

Follow Nicole Urken on Twitter @nicoleurken

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