Analysts Downplay Recent Stock Slump

The thrill ride of the U.S. equity markets in recent weeks is rattling nerves among investors, even as they find signs of hope in the back half of the year.

Since July, shares of publicly traded footwear firms have seen new peaks and new valleys as economic headlines either allayed or fuelled fears regarding the domestic economy and a potential global contagion from the Greek debt crisis.

Among a basket of 30 shoe stocks tracked by Footwear News, 26 companies have seen their share values slide in the three months since the end of June.

As of press time, footwear stocks declined an average of 16.3 percent during the period, a little more than the Dow Jones Industrial Average, which slipped 13.5 percent; and the S&P 500 index, which fell 14.2 percent.

Some of the firms had hit year-to-date highs in July, only to crash as much as 20 percent in August. And they were generally making wilder swings in both directions than the benchmark indices during the month.

Last week alone saw a new market rout, as investors recoiled from the Federal Reserve’s new effort to stimulate the U.S. economy on concerns it is in for a long period of slow growth.

Thursday’s losses built on declines that started late Wednesday after the Fed said it would try to bring down long-term interest rates by replacing $400 billion of its holdings of short-term government debt with long-term U.S. Treasury bonds.

The new slump has effectively erased the 9 percent average gains the industry recorded in the half year between Jan. 1 and June 30. But analysts shrugged off the roller-coaster movements and cautioned investors to consider where prices would land in the long run, not at the end of each day.

“You can’t just focus on one month,” said Robert Samuels, director of equity research at WJB Capital. “There’s long-term opportunity with specific companies benefiting from ongoing trends or square-footage growth, as opposed to investing in a group as a whole.”

Jeff Van Sinderen, analyst at B. Riley & Co., agreed: “Footwear is still relatively resilient, with some businesses executing better now than a year ago. So even in a challenging retail climate, these companies are doing better.”

VF Corp. is one such firm weathering the volatility well. Despite zigzagging from a July high of $121.05 to an August low of $103.88 and back to a new all-time high of $125.16 earlier this month, the company is still up 9.4 percent from June 30, and 37.4 percent from Jan. 1.

Deckers Outdoor Corp., too, has proven to be a reliable bet, rising about $6.46, or 7.3 percent, over the third quarter to date, as the firm continued to see strong demand for its Ugg Australia products.

“It’s certainly not all doom-and-gloom [in the market],” said Van Sinderen. “There are reasons to think some companies will continue to perform well.”

Samuels noted, “Especially in the athletic footwear space, you see much healthier businesses today, with much better inventory levels and fewer promotions.”

In fact, some of the August sell-off could have been overdone, said Christopher Svezia, analyst at Susquehanna Financial. “Overall market volatility, and macro and political news play a role [in stock movements], but trend lines in the business seem intact at many companies,” he said. “While there’s certainly a conservative tone out there, no one’s saying things have been falling apart.”

So what is causing the see-saw movement in the markets? “People are clearly concerned about the possibility of a double-dip recession and the corresponding impact on consumer spending,” said Samuels.

Morningstar Inc. analyst R.J. Hottovy noted that footwear stocks are more susceptible to volatility, as shoes are discretionary purchases. “Anything discretionary [is at risk.] There’s been a flight to safety in the past month, with investors trading away from higher beta names to more stable ones,” he said. “However, footwear stocks [typically] are less volatile than the broader apparel space.”

Analysts noted that many footwear stocks have been “brutally hit” and are now significantly undervalued. “If you time things well, you could [make some money],” said Svezia.

Van Sinderen is bullish about stock movements in the back half because “we’re coming off a very low level. A lot of negative news is already priced into a lot of these stocks. You’ll probably see the market lift on any positive news.”

Collective Brands Inc. was a case in point, closing up 16 percent in August alone. The firm survived a 10 percent slide on S&P’s downgrade, before surging again on news it would close about 475 underperforming Payless and Stride Rite stores in the next three years, as well as explore strategic options for the business as a whole.

And with other firms such as Under Armour Inc. and VF Corp. virtually retracing their peaks earlier this month, it’s possible companies like Deckers could also see a new all-time high between now and December, analysts said.

While the sluggish U.S. and European economies will continue to play on investor psyches into the fourth quarter, Svezia said, “it’s hard to imagine how much lower things can go [because ] a lot of the elements that would fall have already fallen.”

He added, “Barring some cataclysmic macro issue, even with modest economic growth of 1 percent, footwear could still be an outperformer.”

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