Why Are Skechers Shares Getting Stepped On?

When the market saps the stock price of a company that appears to be doing well, it can be baffling. Case in point: Shoemaker Skechers (SKX 2.40%), which has a strong balance sheet, a reasonable growth story, and an ugly stock chart for 2018.

In this segment from MarketFoolery, host Chris Hill and senior analyst Seth Jayson respond to a curious listener who wants to know if the major declines in Skechers' share price are entirely due to the U.S. trade war with China, or if there's something he's missing.

A full transcript follows the video.

This video was recorded on Dec. 18, 2018.

Chris Hill: Question from Matt in Akron, Ohio. "What are your thoughts on Skechers? I have long felt it is a solid company with very little debt and a good growth story. I know the China fears are playing into the decline in price. Is there something else driving it lower that I'm missing?" Great question! Is he missing something?

Seth Jayson: If he's missing it, I'm missing it, too. I looked through it today. I haven't caught up with Skechers for a while. Was it Matt in Columbus?

Hill: Akron. But, yes, Matt.

Jayson: Akron, Columbus. Ohio. It's Ohio.

Hill: [laughs] You know what? I bet there's some level of rivalry between Akron and Columbus.

Jayson: There's some Akron-mony?

Hill: [groans] Let's move on!

Jayson: Let's move on! Domestic wholesale was down slightly in the last call. But, expected to get a little better for Q4. Maybe nobody's expecting that anymore. International was doing pretty well as of Q3. That's more than half the business right now. I hadn't realized that Skechers has almost 3,000 stores worldwide now, in addition to their direct business, the wholesale business. They're really everywhere. They're No. 1 in a whole bunch of categories. I buy a lot of Skechers shoes for my little girl. She's nine and she still likes the flashy shoes. They're generally pretty decent shoes. They look alright for her. They're comfy and they last the appropriate amount of time.

International is doing well. I'm going to say, maybe it's just the China thing for right now. They talked about it in the last call. They still don't know quite what's going on. Nobody does. Their products, as of right now, are not subject to increased tariffs, but they could be if the next tranche of a trade puffery goes through. But, they're always looking at ways to move their manufacturing to other countries. Now, so is everybody else at this point. I would say that maybe the takeaway here is we should all open a shoe factory in Indonesia or Vietnam.

The strong dollar is also making things a little bit tougher. I think we just have the wall of worry here. When you look at how far the stock has come back, and you look at the strong margins they usually produce, the good cash flow production and the balance sheet, Skechers looks like a pretty good long-term bet to me, from this level. May get a chance to get it in the teens or something, it'll be a steal.

Hill: I was going to say, just to be more specific about the numbers, eight months ago, this stock was in the low 40s. Today, it's in the low 20s. Not that you ever want to try and time things perfectly for buying at the bottom, but it certainly has come back a long way.

Jayson: Personally, if we weren't talking about it today, I probably would have bought a third position. When Chris sent this over to me for an idea, the only question I had is, why is anyone so interested in Skechers? Because last I saw, it was $40, and the valuation looked like it was ahead of itself. At $20, we're talking about a much different proposition. I like a company like this, that's pretty steady and trading at a decent discount. Over the years, their return on invested capital vs. their cost of capital is great. They have good returns. They're really solid. I don't see anything that I would worry about, but I've been wrong before.