Tickers in this Article: GES, ANF, URBN, AEO, CHS
When the relative strength index of a stock falls below 30, it is said to be oversold. Well-known jeans manufacturer Guess (NYSE:GES) did so in March, and any time a strong brand appears oversold, investors should take a closer look, as it could represent a good buying opportunity. (For more on retail stocks, check out Analyzing Retail Stocks.)

TUTORIAL: Earnings Quality

Growth at a Reasonable Price
Most people are either value or growth investors. However, some are both, preferring to buy growth but at a reasonable price, which is why Guess is an attractive buy right now. It's still growing, yet its stock is reasonably cheap, and its enterprise value is 7.3-times EBITDA. This compares to 10.7-times for Abercrombie & Fitch (NYSE:ANF). Heck, you can still buy True Religion (Nasdaq:TRLG) at 7.2-times EBITDA, and its jeans are first rate. By almost every valuation metric, Guess appears to be a much better deal than Abercrombie. Furthermore, it's trading below its five-year average in terms of P/E, P/B and P/S. Not only is it cheaper than its peers, but it can be bought for less than in years past. While growth might be slowing, it should be enough for GARP investors. (To learn more, check out Peer Comparison Uncovers Undervalued Stocks.)

Company
EV/EBITDA
Guess? (NYSE:GES)
7.3
Abercrombie & Fitch (NYSE:ANF)
10.7
Urban Outfitters (Nasdaq:URBN)
9.2
American Eagle (NYSE:AEO)
5.0
Chico\'s FAS (NYSE:CHS)
7.5
Fourth Quarter Earnings
Guess announced Q4 2011 earnings March 16, after the close of trading. The next day, its stock dropped 14% on concerns about fiscal 2012 guidance. The company said Q1 earnings would be between 41-44 cents a share, while the consensus estimate was 61 cents a share. You would think investors would have learned by now that analyst estimates are as accurate as weather forecasts. But hold off on the temptation to sell - the best is likely yet to come. Not to mention, you'll save yourself a whole bunch of taxes by holding longer than a year.

The news from the fourth quarter was quite encouraging. European revenues jumped 43%; Asian revenues were up 23%, and North American revenues increased by 8%. The only blemish on its dance card was the North American same-store sales decline of 1.1%. However, on the entire year, its same-store sales increased 2.9%. The quarterly decline would only be worrisome if it was losing money, and that's not the case here. Its operating earnings increased 20% in the quarter thanks to a 30 basis point increase in the margin, combined with an 18% overall revenue gain year-over-year. Management appears conservative in its projections. Considering it delivered $3.11 in diluted earnings per share in fiscal 2011, hitting its guidance of $3.30-3.50 a share in 2012 seems doable. (For a better understanding of earnings, read How To Decode A Company's Earnings Reports.)

Share Repurchases
In its fourth quarter press release, it mentioned that the board of directors approved a new $250 million share repurchase program that includes $85 million from the previous $200 million program. This is a big deal, when you consider past repurchases. In fiscal 2011, it bought back 1.5 million shares at average price of $32.90 a share. Its average price during the year was $41.10, based on a high of $50.95 and a low of $31.24. It managed to repurchase its shares very close to its low for the year. In fiscal 2009, it bought back 2.9 million shares at an average price of $21.23. Its average price during fiscal 2009 was $27.82 based on a high of $45.01, and a low of $10.62. In both years, it did a stellar job repurchasing its shares. It will be interesting to see in the next quarterly report if it was buying when the price dropped below $38 back in April. (For more on stock repurchases, read A Breakdown Of Stock Buybacks.)

The Bottom Line
CEO and founder Paul Marciano owns 12.6% of the company. He has a stake in its success, and it shows. Not too many companies repurchase shares with this much care. It tells me that management pay attention to every detail, including mundane subjects such as stock buybacks. Guess shouldn't be oversold for long. (To read more on how a CEO can help stock performance, check out CEO Savvy And Stock's Success Go Hand In Hand.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center