Investors Finally Dig Fossil Group

 | Feb 14, 2018 | 12:01 PM EST
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Fossil Group (FOSL) , the seemingly struggling retailer and watchmaker that I added to my 2018 Double Net Value Portfolio back in December, soared by more than 80% Wednesday after releasing much-better-than-expected fourth-quarter earnings after the bell on Tuesday.

Following an 8% uptick in regular trading Tuesday ahead of the results, shares soared as much as another 82% early Wednesday and are trading at $14.84 as I write this, up some 64% on the day. That's way better than the $8.34 the stock was trading at when I recommended it back on Jan. 8.

Fossil rallied after the firm reported earning 64 cents per share on $920.8 million of revenues -- crushing analysts' consensus estimate of 40 cents of EPS on $890 million of sales. The chain also said that same-store sales rose 2% for the quarter, which might not sound like a great victory but was also unexpected (and a signal that the company might be on the road back to better times).

Another bright spot: Fossil's balance sheet showed some signs of improvement. The firm ended the quarter with $231 million in cash (or $4.76 per share) against $446 million in debt. That's better than the $166 million in cash and $385 million of debt that FOSL reported for the third quarter. (The company also had $636 million in debt as of Dec. 31, 2016.)

Looking ahead, management said Fossil can generate $150 million to $200 million in adjusted EBITDA on sales that will be 6% to 14% below 2017 levels. Still, FOSL rallied on the report.

But before you get too excited about this name, you should know that Fossil was trading at $130 less than five years ago and has more or less declined ever since. Shares were still trading at around $23 range this time last year, but disappointing results and a difficult environment for specialty retailers combined to knock the stuffing out of the stock over the past 12 months.

In fact, FOSL briefly traded as low as $5.50 intraday in November before perking up slightly as third-quarter earnings came in better than expected. The stock also rose in early January, in my view due to some renewed interest after year-end tax-loss selling. Fossil then increased some more later in January as rumors of a private-equity deal began circulating.

As for Wednesday's rally, there's little doubt in my mind that part of the gains are due to some short-covering. Wall Street has expected little from FOSL, so the shorts have made some nice money on the stock's woes. But short interest stood at 18.9 million shares as of Jan. 31, representing nearly 40% of FOSL's shares outstanding.

Make no mistake, this company is still adapting to a changing retail environment and still faces plenty of headwinds. It will likely never be a $130 stock again. But the market in its infinite wisdom decided just months ago that FOSL was worth less than $6 a share -- which wasn't right either, in my view.

Shares had gotten beaten up to the point that FOSL traded at less than 2x net current asset value. At that point, all that Fossil had to convey to the markets was that the punishment didn't fit the crime. It needed to deliver an earnings surprise, or at least what passes for one given how pessimistic analyst expectations had become.

That's a dance that never gets old in deep-value investing -- buying what many others shun in the belief that it's worth in excess of what the market says it is. My advice: Stay tuned to FOSL on Wednesday. It could be an interesting ride.

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