What Do You Wear During a Painful Selloff? How About G-III Apparel

Painful selloffs are the launching pads for major rallies. The broader market, and small-caps in particular, had a huge run-up from late July through Aug. 16. From that point through Tuesday, the exact reverse played out. As of Tuesday, the Russell 2000 index was on a somewhat rare seven-day losing streak. This one was just the ninth time since 1978 that had happened. Three of those ended on the seventh day. Two others end after eight days. One ran for nine. You have to go back to the 1990s to have seen the two 11-day consecutive downturns. It feels really bad while streaks like those are in effect. It wears you out. That is especially true if you've been actively averaging down only to see whatever you bought head even lower. There is good news, though. Within a month 63.9% of the time the RUT was higher. That trend generally has legs. Nine months after the agony ended 69.4% of the time the RUT had risen. Extend your time horizon out to one year and the RUT had an 88.9% success rate. The most recent of the bad streaks preceding the current one ended abruptly on Christmas Eve of 2018. That was a brutal half-day session that frightened traders who were not paying much attention that day and then had to ponder how bad things might get once trading resumed. We all know how averse people are to holding over weekends and periods with extended downtime before trading resumes. As things turned out Dec. 24 2018 was the final low. The chart above shows the large rally that ensued and lasted through late February. There was hardly a day that allowed those who hadn't bought during the selloff to get in anywhere close to those bargain prices. Exactly one year later the RUT was up a very nice 28.1%, plus dividends. Small-cap stocks fared the worst recently but the major indexes were almost equally bad. The moral of the story? If you wait for confirmation that a bottom is in you typically can't get in cheaply anymore. Now that you know what happens after prolonged downturns, why not buy ahead of the almost inevitable rebound? Stocks of healthy companies that got crushed often make enormous recoveries. G-III Apparel , one of the stocks shown above got hit hard on Tuesday after trimming its fiscal 2022 estimate from $4.25 to about $3.65. Note that the reduced estimate would still represent the second best profits per share in GIII's history. At one point today GIII changed hands as low as $18.27, down from an all-time peak of $73.90 and a 2022 YTD high of $33.40. Except for the momentary Covid-panic low, GIII never traded below 6.2-times earnings. Its long-term average P/E has run about 16.7-times. As of Wednesday, its multiple was just 5.1-times the already trimmed expectation for fiscal 2022 (ends Jan. 2023). Even a partial valuation rebound could easily send GIII back above $50. That suggests upside potential of 160% to 200% from here. Just reclaiming its 2021 peak would deliver almost 92%. Think about what a 5.1-times P/E really means. GIII would earn 19.6% after-tax in 12-months at that rate on its entire equity. That translates into big annual gains in book value, which will not go unrewarded over time. It also makes share buybacks particularly effective in escalating EPS due to the low current shares price. No matter who you believe will be most accurate GIII is clearly worth well above its current quote. Yahoo Finance calls it undervalued and looks for $28 by this time next summer. FastGraphs noted GIII's normalized price-to-earnings has run 16.32-times. That's more than triple what the shares are offered for right now. Note, too that GIII has consistently provided exits for traders at $31.70 to $55.89 during each of the most recent 10 years. EPS are substantially higher now than during all but one of those years. A return to 15-times this year's earnings supports a goal price north of $50. Morningstar agrees, calling GIII's present-day fair value as $34.47. There is absolutely no valid reason for the selloff, which has just taken place. Traders are just trigger happy right now to sell on any hint of disappointing news. Take advantage of their stupidity. Buy GIII while it's offered near an exactly 2021-2022 low. Still not 100% convinced? Consider selling some March 17, 2023 expiration date naked puts at $17.50 to $22.50 strike prices as shown below. Worst-case, forced purchase prices in all cases shown drop to below the lows dating back to before the start of 2021. Premiums are very generous and margins of safety are huge considering how cheap GIII already weighs in. The selloffs since Aug. 16 appear well overdone. G-III Apparel is my Wednesday play of the day. Buy GIII shares, sell GIII puts or consider doing both.

What Do You Wear During a Painful Selloff? How About G-III Apparel

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