Deckers Rarely Presents UGG-ly Trade

Deckers Outdoor , maker of the iconic UGG brand of shoes, boots and slippers, posted disappointing fiscal third-quarter results last Thursday that have set up some great trading opportunities. The stock, a putrid buy-and-hold name, has been a wonderful trading vehicle for those with reasonable time horizons of 12 to 24 months. Over the past seven years DECK mainly has cycled between $30 and $90 a share while earnings from continuing operations have fluctuated in a much tighter range. The year 2011 was the best year, with earnings of $5.07 a share; 2012 saw the lowest profits, at $3.45 per share. The 32% drop from highest to lowest profitability was accompanied by a share price plunge of 76% to under $29, followed immediately by a 250% gain to almost $100. Investors have loved DECK when things were going well and hated it when times turned lean. Taking the contrary side of those trades paid off brilliantly. Such an opportunity has arisen again. A warmer-than-average winter and poor sell-through of full-priced goods led management last Thursday to lower its earnings estimate to about $3.50 per share for the fiscal year that ends March 31. The stock dropped around 25% on that news during Thursday's after-hours session. Here's what I found when reviewing DECK's trading history. The company's average price/earnings multiple since 2010 has been 15.0x. Sojourns to below that level typically ended with the shares valued at 8x to 10x earnings (green-starred below). Exuberant times culminated with above-average multiples that ranged from 17.1x to 23.5x (red-starred). Each of the extreme sell-offs preceded huge rebounds. DECK leapt from $31 to $118 in under two years. It climbed back from $28.50 to $99.90 in 24 months. Intra-year 2016 saw Deckers rise from sub-$41 to near $70. Last Friday, Feb. 3, Deckers opened at $45.60 before sinking quickly a bit further. DECK was back to around 13x its reduced estimate by the end of the day. Just ahead of this week's disappointment, independent research house Morningstar put Decker's present-day fair value at greater than $56. A regression to a more typical P/E on the current full-year projection still would support a 15-month target price of $52.50. A really worst-case temporary low might take DECK briefly to around $35. If that happens I'll be loading up the truck. Rather than simply wait/hope for that occurrence, I used DECK's sharp drop and ultra-high implied volatility to sell some long-term January 2019 expiration date, out-of-the-money puts at $35 and $37.50 put options. A few minutes after the opening, with DECK at $45.28, I collected $5.10 per share for writing the $35 strike price put option. I was able to capture $5.80 per share ($580 per 100-share contract) for selling the $37.50s. Break-even on the more conservative of those strikes dropped to $29.90 per share. Future stock market action never can be guaranteed. I can say for sure, though, that owning Deckers Outdoor would have been a winning position 100% of the time during the previous four years. Selling puts with a greater than 33% margin of safety versus the trade inception price is about as good as it gets in the investment world. Even the $31.70 per share if exercised price on the $37.50 puts would have been in profitable territory about 97% of the time since the start of 2010. Ignore the bad news and consider writing LEAP puts on DECK while the premiums are generous.

Deckers Rarely Presents UGG-ly Trade

The stock is a putrid buy-and-hold name but has been a wonderful trading vehicle over time.

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