Equity markets continued their slide lower
yesterday, with the tech-heavy Nasdaq index now down more than 10% from last week’s all-time highs. This puts it officially in correction territory even if it’s only back at levels last seen only in the middle of August.
For now at least, this doesn’t feel like much more than the market correcting itself after a blow-off rally in August that got fairly frothy towards the end of the month. Still, investors are a little jittery about this summer’s rally having the strength to keep going while unemployment numbers remain at record highs and with no virus vaccine in sight.
That doesn’t mean there aren’t undervalued stocks out there though. Despite the benchmark S&P 500 index finishing down nearly 2% yesterday, one of its lesser-known components finished up more than 8%.
The luxury retail company Tapestry (NYSE: TPR) has been having a solid end of summer/start of fall rally, despite coming into the coronavirus very much on the back foot. Shares were already down 70% from 2012’s all-time highs when the pandemic hit but it got worse. They went on to fall another 65% before the bears got tired at the end of March and opportunistic bulls stepped in. But they’re now up more than 50% from the lows and about 30% in the last two months alone.
So far, so good for those brave enough to get involved in the $4 billion parent company of fashion names like Kate Spade, Coach, and Stuart Weitzman. Shares mightn’t have the gloss of some of this summer’s headline-grabbing tech names, but they’ve been chugging away and any attention they’ve received has been for all the right reasons.
Thursday’s jump has largely been explained by unusually bullish activity in their options. There was a 220% increase in the daily volume of their calls, which are option contracts investors purchase if they believe a stock is going to rally. That kind of jump in volume is typically bullish in and of itself for shareholders as it means that big players, like institutional investors or hedge funds, are positioning themselves to capitalize on a coming rise in share price. As we noted last week, there’s an easy path up towards the $20 level for Tapestry shares from current prices.
For the non-institutional investors among us, there’s plenty to be excited about when it comes to getting involved with Tapestry. They’re trading at around a forward earnings multiple of 8x which is low compared to their peers and offers an enticing entry for value pickers. The risk/reward profile is also appealing as it looks like much of Q1’s selling has been overdone and the market is still adjusting to an improved outlook.
Plenty of Upside
The company’s most recent earnings report in August smashed estimates, with management surprising everyone with how well they’ve managed to pivot to the online sales. Digital revenue more than tripled for the quarter alone. Since then, several sell side firms have thrown their lot in with the fashion house and are backing it to continue rallying. Evercore upgraded their shares to an Outperform rating last month, with analyst Omar Saad seeing huge value in the company’s low price/earnings ratio.
Needham also came out bullish on the stock last month, pointing to the attractive risk profile as well as a low bar set by management for FY21 which they should easily beat. The upside far outweighs the downside at current prices. And with the big boys positioning themselves behind the scenes for another spurt, there are far worse stocks investors could take a punt on right now.
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