Retail? In a recession?

That might be your reaction when you see my latest Stock of the Week.

But I’ve got some very good reasons for liking this stock. It’s off to a strong start to its fiscal year. The company is efficient and good at generating cash. Plus, the stock price has good upward momentum.

And as for that pesky detail about it being a retail stock… Consider this…

The market looks 12 months ahead. The data shows that when the economy is entering or is about to enter a recession… the subsequent 12 months tend to be positive.

So I’m not worried about this stock being in the retail sector. In fact, this is the perfect time to take a look at it.

Get all the details on the stock – including its ticker – in the latest episode of Stock of the Week.

Click on the image below to watch it.

Note: On Monday, I’m going live with a critical message every investor will want to see. If you want to turn this year’s losses into some of the biggest windfalls of your life… then stay tuned. I’m about to reveal the powerful signal that separates stock market winners from stock market losers. Using it could be the single best way to not just survive market downturns… but come out the other side wealthier than ever. I’ll have all the details on Monday.

Transcript

Hi friends, welcome to another Stock of the Week. (You’re in my home, so excuse the casualness.)

I’ve got another good one for you. Now, remember, these videos are a bit of a “tip of the iceberg” analysis of what we do for GVI Investor.

We go through growth, valuation and income… You’re really going to get a good insight into how we look at companies and why we look at them in a 360-degree way… why we look at every single piece of data that is out there about a company.

Of course, nothing’s guaranteed. But it really shows you the due diligence that’s needed in my hedge fund, the justifications that I need.

And this is a stock that my team’s come up with. I like it, so I’ve approved it. I’m the one who judges and decides.

This week’s Stock of the Week is Deckers Outdoor (DECK).

You might have heard of it. It’s got a few subsidiaries, and it’s based out of California.

The company runs under the brands of Ugg, Koolaburra (I’m sure I pronounced that incorrectly), Hoka One One, Teva and Sanuk.

Its products are sold in more than 50 countries through selected department and specialty stores, company-owned and -operated retail stores, and online stores as well, as well as company-owned websites.

So it’s got really wide distribution, which is what you want in a world that is looking increasingly uncertain. You want that geographic diversification… that retail channel diversification.

You might say, “Wait a minute, Alpesh, you’re talking about retail – in what could be potentially a recessionary environment?”

Remember, the markets look 12 months ahead. The data we see shows that if you are entering or are at the cusp of a recession – and in the U.S., we may well be – then the subsequent 12 months from the start of that recession tend to be 12 positive months for the stock market, statistically.

So I’m not too worried about the fact that it’s retail.

We’ve got first quarter financial results. Fiscal year 2023 is off to a solid start, with Hoka driving strong growth as well for the company.

The company’s net sales increased 21.8% to $614 million. $614 million and a 21.8% increase. That’s huge. And those are forecast to grow.

So let’s look at some of the numbers which really attracted me to the company.

First, my Growth-Value-Income rating.

As you know, with my GVI rating, we take the valuation of a company based on its profitability and its share price. We look at revenue growth and dividend yields.

We put all that into an algorithm… we weigh those factors, and we score that out of 10.

We’ve got a company here which is an 8 out of 10. As long as it’s a 7, 8 or 9, we’re fine with that. So that’s greenlighted.

On valuation, growth and income – and we know all of these factors are important in subsequent share price movements – the company is really ticking a lot of boxes.

CROCI is 6.8%. Not the highest we could find, absolutely, but good.

Cash return on capital invested was invented by Deutsche Bank Wealth Management. It’s been used by Goldman Sachs Asset Management for their wealthiest clients. What they found is companies in the top quartile, or the top 25% by cash return on capital invested, as a basket – not every stock, as a basket – produce 30% returns per annum, as long as they’re in that top quartile.

And then the next quartile produces slightly less and so on until the bottom quartile, which produces really poor results.

So you really want things in the top quartile.

This stock narrowly misses out on that, but it’s still right up there. So good cash return on the capital that the company invests. In other words, it’s good at generating cash. And the first thing, before you can make profits, is you need cash.

So that engine is working really well with the company. It’s efficient, it’s productive. That’s what CROCI is telling us.

Six months performance… good. We’ve got some momentum there. Volatility under 20%. I like that. That puts it in the low-volatility category.

Sortino, which is a measure of the average return versus the risk of missing that… well, that’s 0.64. You want that ideally to be above 1, but very few companies in the world are. Anything above or at about 0.3, I’m happy with. Above 0.5, and I’m very happy.

So Deckers ticks all those boxes.

Let’s look at some other numbers…

Return on capital employed is at 31%. Return on equity – a measure of how it’s using its equity, how efficient it is with the capital that it has – is at 30.3%.

Forecast share price to profitability… that’s when you take the share price and ask what’s its forecast profitability and what’s the multiple… 18.8 is neither too high as a valuation nor too low.

So it’s not necessarily overvalued.

I’m happy with those numbers. I don’t mind those numbers.

What I also like is that turnover is forecast to grow 11%. Earnings, or profitability, before tax and interest is forecast to grow just under 10%. Pretax profits are forecast to grow 10.3%.

These are all going in the right direction.

Gearing – or borrowing – is 14.4%. Not too bad. So whilst we’re seeing a higher cost of borrowing, it shouldn’t impact this company too much.

Now, there is a bit of a question mark over operating cash flow, which has dipped back to closer to average. That drop is probably partly due to growth, but because the company’s cash return on capital invested is up there, I’m not too worried about that.

When we look at the share price, we can see it took a bit of a hit – like the rest of the market – since the start of the year. It started to bottom out and then it started to rise again in August, September.

And I think that bottoming-out, that consolidation, means the stock should continue on an upward track.

So that’s my Stock of the Week. I hope you enjoyed it.

I hope you enjoyed that insight and the passion and the energy and the due diligence that goes into GVI Investor.

And stay tuned, because I’ve just found the three stocks I’m most excited about right now. You’ll get more details Monday.