Is Joe's Jeans a Sell?

Should you sell Joe's Jeans (Nasdaq: JOEZ  ) today?

The decision to sell a stock you've researched and followed for months or years is never easy. If you fall in love with your stock holdings, you risk becoming vulnerable to confirmation bias -- listening only to information that supports your theories, and rejecting any contradictions.

In 2004, longtime Fool Bill Mann called confirmation bias one of the most dangerous components of investing. This warning has helped my own personal investing throughout the Great Recession. Now, I want to help you identify potential sell signs on popular stocks within our 4-million-strong Fool.com community.

Today, I'm laser-focused on Joe's Jeans, ready to evaluate its price, valuation, margins, and liquidity. Let's get started!

Don't sell on price
Over the past 12 months, Joe's Jeans has risen 40.2% versus an S&P 500 return of 11.3%. Investors in Joe's Jeans have every reason to be proud of their returns, but is it time to take some off the top? Not necessarily. Short-term outperformance alone is not a sell sign. The market may be just beginning to realize the true, intrinsic value of Joe's Jeans. For historical context, let's compare Joe's Jeans' recent price to its 52-week and five-year highs. I've also included a few other businesses in the same or related industries:

Company

Recent Price

52-Week High

5-Year High

Joe's Jeans

$1.85

$3.60

$3.60

True Religion Apparel (Nasdaq: TRLG  )

$20.45

$34.17

$34.20

Jones Apparel Group (NYSE: JNY  )

$13.79

$24.72

$36.10

Gap (NYSE: GPS  )

$20.91

$26.34

$26.30

Source: Capital IQ, a division of Standard & Poor's.

As you can see, Joe's Jeans is down from its 52-week high. If you bought near the peak, now's the time to think back to why you bought it in the first place. If your reasons still hold true, you shouldn't sell based on this information alone.

Potential sell signs
First, let's look at the gross margins trend, which represents the amount of profit a company makes for each $1 in sales, after deducting all costs directly related to that sale. A deteriorating gross margin over time can indicate that competition has forced the company to lower prices, that it can't control costs, or that its whole industry's facing tough times. Here is Joe's Jeans' gross margin over the past five years:

Source: Capital IQ, a division of Standard & Poor's.

Joe's Jeans has been able to grow its gross margin, which tends to dictate a company's overall profitability. This is great news; however, Joe's Jeans investors need to keep an eye on this over the coming quarters. If margins begin to dip, you'll want to know why.

Next, let's explore what other investors think about Joe's Jeans. We love the contrarian view here at Fool.com, but we don't mind cheating off of our neighbors every once in a while. For this, we'll examine two metrics: Motley Fool CAPS ratings and short interest. The former tells us how Fool.com's 170,000-strong community of individual analysts rate the stock. The latter shows what proportion of investors are betting that the stock will fall. I'm including other peer companies once again for context.

Company

CAPS Rating (out of 5)

Short Interest (% of Float)

Joe's Jeans

4

8.6

True Religion Apparel

3

24.2

Jones Apparel Group

3

4.0

Gap

2

3.9

Source: Capital IQ, a division of Standard & Poor's.

The Fool community is rather bullish on Joe's Jeans. We typically like to see our stocks rated at four or five stars. Anything below that is a less-than-bullish indicator. I highly recommend you visit Joe's Jeans' stock pitch page to see the verbatim reasons behind the ratings.

Here, short interest is at a high 8.6%. This typically indicates that large institutional investors are betting against the stock.

Now, let's study Joe's Jeans' debt situation, with a little help from the debt-to-equity ratio. This metric tells us how much debt the company's taken on, relative to its overall capital structure.

Source: Capital IQ, a division of Standard & Poor's.

Joe's Jeans has taken on additional but unsubstantial debt over the past five years. When we take into account increasing total equity over the same time period, this has caused debt-to-equity to decrease, as seen in the above chart. Based on the trend alone, that's a good sign. I consider a debt-to-equity ratio below 50% to be healthy, though it varies by industry.  Joe's Jeans is currently below this level, at 8%.

The last metric I like to look at is the current ratio, which lets investors judge a company's short-term liquidity. If Joe's Jeans had to convert its current assets to cash in one year, how many times over could the company cover its current liabilities? As of the last filing, Joe's Jeans has a current ratio of 2.28. This is a healthy sign. I like to see companies with current ratios equal to or greater than 1.5.

Finally, it's highly beneficial to determine whether Joe's Jeans belongs in your portfolio -- and to know how many similar businesses already occupy your stable of investments. If you haven't already, be sure to put your tickers into Fool.com's free portfolio tracker, My Watchlist. You can get started right away by clicking here to add Joe's Jeans.

The final recap

Joe's Jeans has failed only one of the quick tests that would make it a sell. This is great, but does it mean you should hold your Joe's Jeans shares? Not necessarily. Just keep your eye on these trends over the coming quarters.

Remember to add Joe's Jeans to My Watchlist  to help you keep track of all our coverage of the company on Fool.com.

If you haven't had a chance yet, be sure to read this article detailing how I missed out on more than $100,000 in gains through wrong-headed selling.

Jeremy Phillips does not own shares of the companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2010, at 12:31 PM, livinlife34 wrote:

    This article forgot to mention the word on the street. Every woman I have talked to that has heard of JOES JEANS loves them. I have a friend who has a retail store that sells JOES and she said they are here best selling jean. The word on the street is BUY !

  • Report this Comment On November 29, 2010, at 1:03 PM, auste27 wrote:

    Livinlife34,

    I agree. Word on the street is important. I live in Boston and see more and more people wearing Joe's Jeans and constantly hear about people loving their product and their customer service. Those are huge signs that a company has an advantage over its competitors. Not to mention on the most recent conference call the CEO discussed that they are stealing market share from competitors, and they are opening new retail outlets that are proving successful based on same store sales. I am so bullish and think the shorts and the street are wrong, and not enough people know about this little jean company. If they can even come close to the size of True Religion, let alone surpass them, shareholders will be rewarded greatly.

  • Report this Comment On November 29, 2010, at 3:58 PM, herbertslojewski wrote:

    Great, another Fool-assed article with a panicky title. Keep posting things like this and soon we'll have JOEZ down to a penny or two, and then you will shoot out another article entitled, "Is JOEZ overvalued at one cent per share?"

  • Report this Comment On November 29, 2010, at 3:58 PM, StockMaster30 wrote:

    I love how this jeans look on my wife and have been loading on their stock I own close 5,000 shares now and counting

  • Report this Comment On December 01, 2010, at 9:11 PM, Freshmaninvest12 wrote:

    It hurts me to do this, as this was one of my first stock purchases in my IRA. At first look I thought this company to be a value, and growth play in and industry that I could understand. But after some further research, it's time to take the hammer down on Joes jeans. Yes, word on the street is correct, people love joes jeans. I myself also own two pair, there comfortable not too pricey and costumer service is not too shabby.

    Value.. The 4 P/E multiple is calculated by using the trailing 12 month (No surprise there). Joez had a blow out quarter of .05 cents a share. Which is contributing to that trailing multiple. The consensus estimate for 2010 EPS is .04 cents. Basic math tells us the real multiple for Joez is really around P/E 40!! Value.. I see no Value.

    Growth.. Lets talk about growth.. This is the good part. Clever little bastards(scuse my language) I've lost a good chunk of my start up money for my IRA i'm twenty now. Year over year EPS growth is a big fat NEGATIVE number! .11 cents 09' and 2011 estimate of .08 cents. Ouch. Ok, so your probably thinking well what about those impressive sales #'s! Oh, no doubt they are impressive. Question for you, how many of you actually own joez or visited the website? Well if the answer is yes then you have probably noticed there common 25%-40% off sales, while there competitor True religion aims to keep margins high. Having trouble moving inventory, or trying to buff up there sales numbers? Perhaps both.

    Is Joes jeans a sell...

    What's your time frame?

  • Report this Comment On December 02, 2010, at 10:58 AM, livinlife34 wrote:

    I happen to own a number of shares of joes jeans stock. You can talk all you want about numbers and this and that. Like I said the word on the street is very good ! I have alot of female freinds and they LOVE joes jeans. I have a freind whose wife works at Nordstrom she is a buyer. She says joes jeans are selling very good. I have a female friend who lives in New York. When I asked her if she has ever heard of Joes and to my surprise she said yes and that all the girls at work love them, and not only their jeans their shoes too ! I do my research talking to people who work at stores that sell them and yes they are catching on. I feel it is only a matter of time before this stock goes through the roof ! Every company has problems and every company starts out small. All I know there are alot of good things being said about JOEs products

  • Report this Comment On December 03, 2010, at 1:32 AM, Freshmaninvest12 wrote:

    Well, if your investing philosophy is "numbers don't matter." Then perhaps you might be better suited with CD's or bonds. I don't mean that offensively. I love there product as well, just bough two more pair. Most comfortable jean i've ever worn :). But I think short term, were in for a wild ride. And long term, investors should be rewarded for patience. You are correct, taking market share, and establishing brand dominance takes time. Margins will give us a better indicator, but these 40% off sales are not helpful. This is and important quarter for them. If they can't beat estimates, well then bring on the pain!

  • Report this Comment On December 04, 2010, at 3:04 AM, BOSINVMTSOLUTION wrote:

    I've only dabbled into this company, but from what I can see from the comments above people are not doing their research. It is very important to remember that when it comes to running a business the only thing you care about is the ability to generate cash. That income statement is for uncle sam. If you look at their cash flow statement over the past five years and in recent quarters it creates some worries. Cash flow is very erratic and recently has ventured into negative territory for 3 consecutive quarters. Unless Joe learns how to start making cash and not burning, it won't matter how popular their jeans are. I always recommend that people use a cash yield approach when initially analyzing companies to weed out the losers. Simply take your cash flow from operations (ttm) minus CAPEX, and then divide by the companies market capitalization. If it's not at least ten percent, move on. Joel Greenblatt is an esteemed value investor an is an advocate to this approach.

  • Report this Comment On December 05, 2010, at 1:52 AM, Freshmaninvest12 wrote:

    Worrying only about the ability to generate cash, is a very narrow minded, and ineffective way to invest. If you did your home work before criticizing others you would know that Joes has been aggressively expanding by opening outlets and stores across the country, and recently announced plans to open franchise stores in Europe. Negative operational cash flow is often a common side effect of aggressive growth strategies. So you look for steady and increasing sales numbers which are present and have a correlation to growth. Which bring me to my next point, JOEZ isn't a value stock, it's a growth stock, so Joel Greenblatt wouldn't use that model on this company as you can't compare apples to oranges.

  • Report this Comment On December 06, 2010, at 9:23 AM, livinlife34 wrote:

    Couldn't have said it better freshmaninvest12. Joes is expanding. They have opened I think 14 new stores. Of course it is going to have an impact on operating cash. Everybody has a different way to evalute stocks. I think you are also a 100% right in the short term we are in for a wild ride but should be rewarded if we are patient with this stock.

  • Report this Comment On December 12, 2010, at 6:54 PM, MJR222 wrote:

    I have been in and out of this name a handful of times and have made decent money. $1.50 needs to hold or JOEZ will be technically broken and more selling will certainly happen . Charts don't lie, people do. Which leads me to my biggest red flag and why I have not put a position back on even at this level yet. All the big volume down days in recent months have been due to insider selling. If they really felt their stock was going to $5 anytime soon, they would not be hammering it under $2 and ticking off shareholders. Just not smart. Actions not matching conference call words is never good.

Add your comment.

DocumentId: 1382770, ~/Articles/ArticleHandler.aspx, 7/22/2014 6:24:33 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement