"I subscribe to the law of contrary public opinion... If everyone thinks one thing, then I say, bet the other way..." Ricky Roma, Glengarry Glen Ross (1992)
I typically don't pay much attention to sell-side rating gyrations when I am evaluating a position. But every once in a while you come across an analyst call that catches your eye because the timing, nature of the note, and incentive to make such a move makes very little sense. Over the last week, Deckers (DECK) was hit by not just one but two of these notes. In both instances, the broker notes can be best described as attempt to get marginally bearish on a stock. And what I mean by that is you are basically publishing something that doesn't involve any material news, but that is a way of saying 'I am just a little bit more bearish on this stock.' Usually you write something like this off to market noise and pay very little attention to it, but this is one of those situations that makes that hard to do. See sell-side analysts are not known for being risk takers; they didn't get to where they are by putting their necks on the chopping block. So, when I see two analysts issuing bearish tweak notes on a stock that is trading within 15-20% of a multi-year low and whose problems are very well known; I get a little suspicious. This is because I immediately start to think what is the upside here in getting incrementally more bearish on a stock that has been hammered. Unless I have something really concrete, the risk/reward to getting more bearish ahead of upcoming material news stinks. With that in mind, let's take a look at these notes.
Note 1- This analyst cut Deckers to neutral yet maintained a $45 target. This is a bit of a strange move considering the stock was at $38 when he made his call, and it is an even stranger move when you read the note. The analyst pretty much blames the weather for not cooperating again, but then cautions that this is not really an issue for Q4 but rather a concern for next year's backlog. This really doesn't make much sense when you consider the market is intensely focused for now on how much inventory was worked through and also because there is plenty of data indicating the brand was as hot as ever during the holiday season. Do I really want to make a fall 2013 backlog call here at this price point in the stock knowing full well that a takeover is possible in 2013? Obviously not. And better yet do I want to make such a call a week before a major retail conference and four weeks before earnings are released. Unless I know something or have another agenda, the answer is clearly known.
Note 2- This analyst maintained a neutral rating on the stock while reducing his price target from $35 to $34. His note cited checks in the UK market that revealed a surprising amount of styles on promotion. This is then extrapolated into Uggs price pressure outside the U.S. too, and thus further long-term pressure on the operating model. Now this is a stretch note if I have ever seen one because first of all Uggs as a brand has not even scratched the surface outside of North America. This is still an 80% U.S. business, and that is generally how the stock is evaluated. To issue a broad international bearish trends note ahead of material news on the relevant domestic business makes little sense. It makes even less sense when all you come away with is a $1 price target change and rating maintenance. Yet this note comes out the morning after short interest data (first material decline in six months) is released and on the back of heavy call buying and serious takeover chatter that had been bidding the shares into the close and after the market the previous day. Hmm…..
Now despite my suspicions, these notes in and of themselves are not really worth getting excited about. Staying away from a bold call on the eye of the inventory storm is not exactly a bad idea, and these notes can generate some trading activity in what has been a volatile stock. That alone is enough to overlook them, but the problem here is I have done my own homework. I have talked to two sell-siders who cover the name as well as to a couple wholesalers. But before bringing that up I suggest visiting an Ugg concept store in Moscow and Paris or even the Level Shoe District in Dubai Mall and asking an employee about promotions to move stock. The dumbfounded stares you get back are priceless. I mean who'd expect that these sheepskin boots are one of the hottest selling item in a shoe district in the middle of a desert. But then again it is not like holiday search data doesn't support such an odd finding. Still, just to make sure I wasn't suffering some sort of distorted perception of reality, I made sure I talked to a few people in the know on the topic. What I came away with wasn't very shocking. One analyst described sales check feedback as 'unreal' while another told me the response he got to inventory questions at a major reseller was 'it's a graveyard back there.' Both also hinted that most of their checks revealed less discounting than expected, and that anecdotal reactions on the topic were along the lines of the 'are you serious' responses I had witnessed. Put this all together and you will conclude that somebody is going to end up being very wrong here. The question at this point is figuring out who, but when I account for other intangibles, I think remaining firmly parked on the bullish side of this makes perfect sense.
Here is why….
1) Call option activity in the stock has been very aggressive - Options market is usually a great leading indicator for a stock, and so far Deckers has seen considerable and aggressive call buying. Either there are some parties who are very convinced February earnings will surprise rather modestly or the speculation about Deckers being in play is not speculation.
2) Takeover chatter is getting a little more intriguing - I am biased on this topic as I expect Labelux to eventually pull the trigger and buy this company, but despite that, the increasing chatter is getting a little hard to ignore. The buyout rumors were reignited on Wednesday and I personally called around to see what I could find. What I came away with from one trading desk was a rumor that Deckers had already shot down an informal $51 a share offer. Now at about a 30% premium to where the stock has been trading that doesn't seem too shocking as that would probably be the price a legitimate buyer would offer for this company. Now I am sure the CEO has different expectations, but at this point, that doesn't really matter as an offer at price would be credible.
I would also add that recent amendments to the bylaws can be interpreted as a defensive maneuver and today's news concerning Billabong/VF (VFC) supports both the type of market premium (though I will note that at the EV/EBITDA Billabong is getting Deckers would be trading closer to $80) that has been tossed around as well as my theory that some short sellers may have been leaning on their brokers for some help getting out before this week's conference, which interestingly enough the CEO is not planning on attending. Anyway all this action has me long the stock again so let's see how that turns out.