Build Up Your Portfolio With Skechers

 | Nov 18, 2011 | 2:30 PM EST  | Comments
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Stock quotes in this article:

skx

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bks

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rimm

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shld

I seem to excel in stirring up controversy lately. When I suggested on Facebook that the real culprit for the early opening of retail stores on Black Friday lay not with evil corporations but those foolish enough to stand in line in the middle of the night, my wall was bombarded with comments.

A hint that new uniforms didn't mean much without putting new pitchers in them made my fellow Baltimore Orioles fans irate.

A suggestion that Sears Holdings (SHLD) was not worth two to three times the current stock price based on brand value has one Chicago hedge-fund type burning me in effigy.

Since I'm on a roll, I may as well visit the idea of selling puts on value stocks and look for candidates where I can create the stock below the current market price. The idea that options can actually increase the margin of safety is sacrilege among many sects of the Church of Value, but I find it to be true.

One of my measures (like many other options traders) for when to start selling options is volatility. When I look at the Volatility Index (VIX), the range has shifted to roughly 25 to 35 from 15 to 20 earlier this year. It may settle down a little today, but the VIX has been moving higher most of the week. Over 35 and I am an enthusiastic options seller. Over 40 and I am ecstatic.

Since I always post 100% of the strike price of a stock, I don't have to worry about margin calls if the VIX and prices spike against me, so I can focus on the net price at which I am creating the stock. I never sell index puts, and those who sell puts on levered exchange-traded funds are planning their own funerals. Everything starts with underlying stock valuation, and then I look for options that might be worth selling.

One stock I have had success selling options on this year is Skechers USA (SKX). The company recently reported that profit and revenue had plunged again because it produced too many pairs of its popular toning-and-exercise shoes, Tone-Ups, creating an inventory glut. There are signs that this is finally working through the pipeline as margins have improved slightly. Skechers is back to more reasonable production and inventory levels, so it should see revenue and profit resume their growth trajectory. I was in Tyson Corner, Va., last weekend and the Skechers store in that giant mall was busy. (My in-house fashionistas tell me they love the shoes.) Also, the company is also focusing on international expansion, announcing Sketchers Japan for expansion into Asia.

The stock is cheap, closing Thursday at $12.28. The shares trade at about two-thirds of tangible book value and are right around my estimate of liquidation value of the company. Skechers has $248 million cash and about $138 million of combined long- and short-term debt, so the balance sheet is in good shape. In fact, the company's Altman Z Score is a healthy 4.3, so the financial health of the company is robust and not a concern.

Looking at the options, I see that fair value of the January 20 $11 put options is $0.61, so if I can sell them for that or better with the stock changing hands around $12.30 today, I will. Adventurous traders might want to consider the December 16 $12 puts at $0.65 or better.

Selling options is a strategy that makes sense in the current market. If volatility remains at relatively high levels, we can sell expensive options in cheap stocks. In the last few weeks, I have suggested selling option in Barnes & Noble (BKS) and Research In Motion (RIMM). I'm adding Skechers to the list, and I'll be putting offers in later today.

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