Each week I cull a top stock idea from the pitches made on CAPS, the Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow the weekly picks? Follow me on Facebook or Twitter.

Company

Coach (NYSE:COH)

Star Rating

****

Industry

Consumer goods

Market Cap

$13.93 billion

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

Coach investors have had a rough year, with the stock down almost 35% in the past year and down 10.5% year to date after the company missed earnings expectations in January. The company is attempting to reinvent itself as a "lifestyle" brand as it strives to compete with fast-growing competitors Michael Kors (NYSE:KORS), Ralph Lauren (NYSE:RL), and Tory Burch, which benefit from their famous founding fashion designers. The stock is down as investors are nervous over the company's transition which will include a new CEO next year. Some investors think the drop is an opportunity, including CAPS All-Star NovaTodd. Last September, NovaTodd picked the stock to outperform the market over the next five years, and just last week, NovaTodd made a pitch for Coach.

Coach Outperform Pick

Pitch Submitted By:

NovaTodd

Member Rating:

84.80

Submitted On:

March 20, 2013

Stock Price at Original Outperform Recommendation:

$53.33

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
I bought yesterday at $48.00. I consider this a bargain for a company with such an outstanding track record of efficiency and profitability. ROIC has been consistently north of 40% over the past several years, and checked in at 56% last year; sales per square foot is close to $2,000 and ranks among the very best in the retail sector. Coach has a rock-solid balance sheet with a strong cash position and minimal long-term obligations; in fact, FCF generated last year alone adds up to about 80% of total liabilities on the balance sheet.

The valuation looks good right now: Price/Cash Flow is about 11.5, which is below the industry average of 16 and the company's own five year average of 15. The shares yield 2.4%, and the current dividend payout is only about 35% of free cash flow. Realistically, the shares could yield north of 4% in five years using the current price and applying a fairly conservative growth estimate to the dividend. The share count has also been in decline over the past few years.

I'm no fashion aficionado, but I think Coach has built a durable brand that will continue to command a premium price for the next several years.

Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of Coach. 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.