Seeking Alpha
Deep value, contrarian, portfolio strategy, long only
Profile| Send Message|
( followers)  

During this article, I shall make you warm for my very first 'short' thesis published on Seeking Alpha. I wrote this article, not to bias the stock or to make quick profits of my own short positions (because I never owned any shorts), nor do I believe Kors will crash anytime soon.

I just want to warn every investor out there who is considering to initiate a position in Michael Kors (NYSE:KORS) at current price levels.

Kors' current high valuation

Kors is currently quoting against a $80.58 share price, indicating a market cap of 16.32B, an expected P/E ratio of 23.17, a P/S ratio of 6.24 and a P/FCF ratio of 65.58. (finviz)

Many investors have justified these high valuation figures because of Kors' strong growth figures, its high profitability, its nice prospects and its strong balance sheet. However, I want to remind the readers that trees (unfortunately) don't grow to the sky.

Furthermore, be aware that start-ups always grow harder/faster than already more established companies. Kors' growth therefore, is not really exceptional, in fact, it would be exceptional if a trendy company like Kors wouldn't show high growth figures.

Similar experience

As I believe it is always helpful to take a look at what happened in the past when making an investment decision, I'm inviting you to take a look at what happened to one of Kors' peers: Coach (NYSE:COH).

Not so long ago, Coach was a very popular growth stock; now, the stock seems to be unappreciated and left behind (gaining only 3.6% this year).

Before we go any further, I want the readers to take a good look at the following graph, which compares Coach and Kors' stock performance since 2011 in % (dividends excluded).

(click to enlarge)

As a Kors investor, you might be very delighted with your investment so far. Kors' stock gained 223% in 2 years, while Coach only gained 0.87% in 3 years. Let me stress this once again, Coach only gained 0.87% in 3 years' time.

* For the confused investor: KORS went public in 2012 so there is no data before that date*

Next, I want you to take a look at the following graph, comparing Coach and KORS since 2009.

(click to enlarge)

During 2009-2012, Coach gained more than 220% as it was showing very nice growth figures in sales and net earnings (just like Kors).

Since then, the stock had another (rather short) rally of 30% before finally calming down and staying around its current share price.

Investors who decided to initiate a position right after Coach's massive rally of 220%, are probably still sitting on a loss or a small gain (because of the dividends) depending on how high they got in.

My point being:

Kors is currently enjoying its momentum of being a trendy growth stock (the stock gained more than 220% since its IPO in 2012) and could still gain some more during 2014.

After 2014, I suspect the stock will make a correction (just like Coach) or to remain flat for several years.

I am very aware that Kors is showing strong growth figures, has high profitability ratios and has no debt, but I am saying that new investors might want to watch out. Initiating a new position in a stock that already quotes at a very nice premium for its future growth figures could not be the best bet to make.

The problem is that Kors is already quoting at a high valuation and that it is pure guessing right now whether or not the stock will go higher. If you are a value investor, timing the market should not be your priority and therefore I believe it is best to keep your hands off of Kors.

Source: Michael Kors: Don't Get In Now