High-Step Into Footwear

 | Nov 18, 2011 | 11:30 AM EST  | Comments
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The holidays are upon us, so it is natural to think of shopping -- which means paying attention to retailers. And the outlook for retailers is promising.

The U.S. Commerce Department just released a report that said retail sales rose 0.5% from the previous month, the fifth consecutive monthly increase. Excluding strong auto sales, retail sales jumped 0.6%, and if you deduct gasoline sales too, the increase was even better at 0.7%.

The National Retail Federation says sales for the holiday season should increase 2.8% over 2010. That's lower than the 5.2% increase last year (which came off a weak 2009 retail environment), but still a bit higher than the average holiday sales increase of 2.6% over the past decade.

With consumers seemingly poised to open their wallets, I found one not-so-obvious industry that could benefit: footwear. In fact, footwear makers should do well beyond the current holiday season, which is one reason you should pay attention to them. Another reason is my guru strategies (based on how great Wall Street investors like to invest) give three footwear makers very strong endorsements.

First up is Deckers Outdoor (DECK), a high-stepping seller of athletic and high-end casual shoes under such brand names as Teva, Mozo and Tsubo, among others. But its best-selling brand is Ugg, the unisex sheepskin boots popular with celebrities. Today, Deckers' annual revenue exceeds $1 billion and its market cap is about $4 billion.

Deckers is a snug fit with a strategy based on the writings of Peter Lynch. In particular, Deckers price-to-earnings-growth ratio is a strong 0.62. The PEG is a measure of how much the investor is paying for growth, and combines PE ratio with the company's growth rate. The maximum PEG allowed is 1.0. Deckers' PE is 24.91, based on its three-, four- and five-year historical EPS growth rates and the company's growth is powering along at a 40.5% clip. Another plus for Deckers is its debt level, which is quite low.

Benjamin Graham, Warren Buffett's mentor, is considered the godfather of investment strategists, and the strategy I created from Graham's writings is kicking up its heels over Skechers (SKX). The company markets both "lifestyle footwear," which include casual shoes and fitness footwear, such as running shoes.

The Graham strategy likes Skechers' sizable sales of $1.8 billion, plentiful liquidity with a current ratio of 3.66:1 (nearly double the strategy's minimum of 2.0:1), very small debt load and moderate PE of 7.2. The strategy also multiplies the company's price-to-book ratio by the PE and places a maximum on this of 22. Skechers' PB is 0.68 and its PE is 7.2, providing a low 4.9 result.

Steven Madden (SHOO) sells shoes under the Steven Madden, David Aaron and Steven's brands. Madden himself is a well-known shoe designer who, in the early 1990s, introduced a women's shoe with a thick, chunky heel that became a bestseller. Revenue now run in excess of $600 million and the company's market cap is $1.4 billion. Like Deckers, Steven Madden gets the nod from my Lynch strategy. The company's PEG is a desirable 0.58, while debt is very, very low.

All these footwear companies are doing well and are well positioned in coming quarters for any uptick in consumer demand. If you want to step up your investing and get a foot in the door of a solid industry, any of these companies should be a great fit.

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