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Summary

  • Wall Street analysts have already chosen Michael Kors and Kate Spade over Coach.
  • Wall Street analysts frequently and incorrectly pick stocks at their high and low.
  • Wall Street's interests are short term and conflict with the longer term time horizon of an individual investor.
  • COH is still highly profitable despite its current struggles.

It can be very difficult to tell when a company's business is fading or just experiencing a temporary setback. If an individual investor listens to Wall Street analysts and the financial news channels on a regular basis, "falsely reported" deaths and demises of companies are reported on a daily basis.

Currently, Coach (NYSE:COH) is one such stock that has been dropping from its all-time high in 2012 to a steep decline in May through June 2014. COH has become a "show me" stock for Wall Street analysts as earnings estimates and price targets have fallen dramatically in the last several weeks after a disappointing earnings announcement in April 2014 and analyst day in June 2014.

The interests of Wall Street are not the same as an individual investor's interests. Professional bulls and bears for any particular stock have contacts in the media and push their long or short agenda through positive or negative articles or news stories. When a stock is hot Wall Street analysts project good times forever into infinity. When circumstances are negative for a company Wall Street analysts project that a company at hand will not adapt, cannot adapt, are too late to adapt or if they adapt, will fail. No stock ever keeps growing into infinity and rarely do stocks sink to zero.

Whenever Wall Street starts asserting definitive arguments with absolute certainty, as is the case with COH, watch out, as this is where an individual investor's opportunity arises. Let us see some examples with respect to other stocks from recent years that have struggled in a manner similar to COH:

Nike (NYSE:NKE) - In the late 1990s, Wall Street analysts said that no one was wearing running shoes any more, people were wearing "Brown shoes". Over time, Wall Street analysts were proven wrong.

Starbucks (NASDAQ:SBUX) - In 2007-08, Wall Street analysts said McDonald's (NYSE:MCD) and Dunkin Donuts (NASDAQ:DNKN) were after SBUX in the brewed coffee space and consumers would not pay for SBUX's high priced coffee. Once again, Wall Street was proven wrong.

Intel (NASDAQ:INTC) - In the last few years the share prices of INTC (along with Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ)) struggled as Wall Street analysts said that tablet computers were killing the personal computer (PC) business and PCs were "dead." Again, recent news has proven Wall Street analysts wrong.

The point of such examples is that whenever Wall Street sets up a paradigm such as Company A vs. Company B, where they have already chosen a winner between competing companies and assume a particular struggling company has already lost and will stand still in the face of competition and wither and die, that is where an investor's opportunity to buy comes. Let us look specifically at COH, and let us use common sense.

COH is a classic brand known for high quality products that has had many years of success and has hit a rough patch in the North American Market. In Asia, and China in particular, COH continues to be one of the most popular affordable luxury brands. With so much success COH has spawned many competitors, but when an investor thinks about the affordable luxury handbag market, there is only one classic American company in the handbag space--COH. Michael Kors (NYSE:KORS) and Kate Spade (NYSE:KATE) are not classic brands, but rather trendy of the moment brands which are not of the same quality as COH. Wall Street has set up their paradigm in this space given COH's recent struggle in the North American market and has already declared their winners. This is where the buying opportunity is.

Should an investor think COH is standing still in these circumstances? Should an investor think that COH does not have plans to address their problems? Of course, an individual investor should not think this way. COH has been working on changing their course for over a year now, long before COH's recent stock price plunge. COH knew the areas of their business that needed adjustments and hired one of the best designers in the hand bag business, Stuart Vevers. Let us review one article about Mr. Vevers:

Indeed, Vevers-who will be in charge of all creative aspects of the brand [Coach]-has a wealth of hit-handbag experience. Before heading to Loewe in 2008, he held positions at Bottega Veneta, Givenchy, Calvin Klein, and Louis Vuitton, each of which have strong accessories ranges. The English designer also won the British Fashion Council's Accessory Designer of the Year award in 2006 while working as the creative director of Mulberry, a role that he held from 2005 to 2008.

Rave reviews are pouring in on Stuart Vevers' first clothing collection for COH:

When Vevers, who previously helmed the LVMH-owned Loewe label, was tapped to replace Reed Krakoff last year, insiders wondered about the need for a clothing line from Coach. Could Vevers make it relevant?

He could and he did. Editors walked away raving about the collection, not least of all because of the accessibility factor. Vevers' coats and jackets will top out at around $3,000-an opening price for a shearling from a European luxury brand-and most will retail for much less than that.

COH is a highly profitable business with some of the most successful retail stores in the U.S. per square foot of retail space despite their current struggles. Now is the time to make a measured investment in COH.

COH is a classic American brand of affordable luxury (and KORS and KATE are not) known for its high quality leather hand bags. All the premature arguments against COH have been set forth by Wall Street analysts who have "thrown in the towel" on COH stock. That said, a prudent bet on COH will likely be a winner and Wall Street will likely prove to be wrong (as usual). Wall Street will start raising COH to a buy when it's $50 a share again (as is typical of Wall Street analysts). Come back to this article in 18 months or so, and let us see whether Wall Street in all its "expert" analysis is correct or the author of this article.

The author owns shares of COH as of the writing of this article.

Disclosure: The author is long COH, SBUX, NKE, INTC, MSFT, HPQ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Wall Street Is Prematurely Betting Against Coach