One of the best-performing areas of the economy this year is the Consumer Discretionary sector, which for the year is up more than 12%. About half of that move has come since the beginning of May as this sector has been one that has led the market even as uncertainty has pushed other sectors lower or at least into a mostly sideways pattern over the same period. A lot of that move has been driven by mostly positive economic data showing continued low unemployment with gradually increasing income levels as well as increasing consumer confidence. That’s been good news for stocks like Columbia Sportswear Company (COLM). The stock is up 26% year-to-date, and more than 64% over the past year.
Depending on your perspective, seeing a stock staging such a strong upward trend over the past year can prompt a couple of different ideas. If you use the long-term trend as a primary indication of trade direction, the stock’s current strength should naturally make you think about placing a bullish trade. If you follow a value-based or contrarian approach, the strength of the long-term upward trend should lead you to wonder if the best opportunity has already passed, and if in fact the downside risk right now outweighs any remaining upside potential.
Based on the company’s most recent earnings report, COLM’s fundamentals are all healthy and seem to indicate not only that business has been growing, but also that it should continue to do so for the foreseeable future. The company’s business is very cyclic in nature, owing to the fact that it so closely tied consumer preferences and trends, as well as to the ebb and flow of seasonal shifts in those trends; even so, over the past year the company has shown strength in just about every important, measurable area. The company itself, however raised a few red flags in its discussion in their report of risks. The fact is that the company manufactures all of its products abroad, using short-term contracts with producers worldwide. Management specifically mentioned concerns about the U.K.’s pending withdrawal from the European Union as well as trade tensions between the U.S. and its trading partners as geopolitical issues that stand to impact them in a negative way.
Fundamental and Value Profile
Columbia Sportswear Company is an apparel and footwear company. The Company designs, sources, markets and distributes outdoor lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel, prAna and other brands. Its geographic segments are the United States, Latin America and Asia Pacific (LAAP), Europe, Middle East and Africa (EMEA), and Canada. The Company develops and manages its merchandise in categories, including apparel, accessories and equipment, and footwear. It distributes its products through a mix of wholesale distribution channels, its own direct-to-consumer channels (retail stores and e-commerce), independent distributors and licensees. As of December 31, 2016, its products were sold in approximately 90 countries. In 59 of those countries, it sells to independent distributors to whom it has granted distribution rights. Contract manufacturers located outside the United States manufacture all of its products. COLM has a current market cap of $6.5 billion.
- Earnings and Sales Growth: Over the last twelve months, earnings increased impressively, at almost 51%, while sales increased more modestly, at about 12%. Growing earnings faster than sales is difficult, and generally isn’t sustainable in the long term, but it is also a mark of management’s ability to maximize its business operations and manage costs. It should be noted that the company’s Net Income is only about 5% of Revenue, which indicates that they operate with a very narrow margin profile.
- Free Cash Flow: COLM’s Free Cash Flow is healthy at a little over $278 million. Their available cash and liquid assets has increased over the last two quarter from about $450 million to more than $808 million in the last quarter.
- Debt to Equity: COLM has a debt/equity ratio of 0; they have little to no long-term debt.
- Dividend: COLM pays an annual dividend of $.88 per share. At the stock’s current price, that translates to a dividend yield of 0.95%.
- Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for COLM is $24.16 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.81. That’s a bit higher than I usually like to see, but the average for the Textiles, Apparel & Luxury Goods industry is 4.4, while the historical average for COLM is 2.5. While the industry average suggests the stock could still offer some more upside, in this case I think the historical average is a stronger indicator. The stock is significantly overvalued, since a drop to par with the average would put the stock a little below $62 per share.
Here’s a look at the stock’s latest technical chart.
- Current Price Action/Trends and Pivots: The 2-year chart here clearly shows the stock’s impressive run since June of last year; the red diagonal line traces the stock’s trend from that point to its recent high at around $94 per share. The stock has been hovering near to, but slightly below that high level for the past month, an indication of consolidation and uncertainty about how much upside the stock has left. In and of itself, that isn’t an indication that the stock is sure to reverse, of course, since the stock could pick up momentum and push higher yet again. However, the red horizontal lines on the right side of the chart, which trace the stock’s current Fibonacci retracement levels, are a good indication of how much technical risk there is right now. If the stock breaks below its current support at around $90, it would likely not find meaningful support before dropping to as low as $78 or $77 per share. If economic conditions begin to deteriorate, an even deeper decline isn’t out of the questions, with the $62 forecast from the stock’s historical Price/Book ratio – a price level the stock last saw in November of last year – clearly within reach.
- Near-term Keys: For the stock to maintain its longer-term upward trend in the short-term, it would have to break above $95 will considerable buying volume to provide momentum and strength. Far more likely right now is a decline to somewhere between $78 and $80, where the stock could then test the strength of its long-term trend and possibly set up a new bullish trade from a solid retracement pattern. A break below $90 would indicate that test is imminent; it could also provide a short-term, momentum-based bearish trade set up for shorting the stock or working with put options.