If you're the sensitive type, go ahead and file this under "bash." I'm going to suggest that you not jump into Guess?
Heresy, I know. Especially now. After all, didn't Cramer plug the stock this week? And aren't we seeing report after report of how retailers are going to have a stellar holiday season?
We sure are, and that's why I'm saying "whoa!"
Take a look around. We're bound to be in one of those "hooray for everything" markets, where a rising tide lifts all boats. Retailers and apparel makers, especially those who market to the younger crowd, have been on an absolute tear over the past few months.
Want proof? Check out the chart from Guess? and peers American Eagle Outfitters
So why am I picking on Guess? Simply because I know the company pretty well, and I own the stock.
Don't get me wrong: Guess's sales and earnings growth over the past two years have been astounding, and the firm still has room to improve margins. Its overseas growth should provide more high-margin sales, and it does have ample opportunities to increase store count, especially with sub-brands like accessory stores and the Marciano line.
But honestly, at today's prices, all my reasonable growth predictions are already priced into the stock. Fair warning: I'm a cheapskate. I only buy stocks when they're selling at a decent discount to what I believe their true worth to be.
Unfortunately, the same old boring discounted cash flow valuation method that helped me peg Guess? as a triple two years back now suggests that the company is pretty close to fairly valued. Let me put it this way: With the shares at $55 each, the company must increase cash earnings at a 23%-per-year clip for the next five years, then 8% per year for the next five, in order to meet my required rate of return of 12%.
I happen to think that's possible, maybe even likely. That's why I continue to hold the stock. Guess? has a great habit of beating my expectations, quarter after quarter. But I wouldn't suggest that Fools load the ship with shares at these prices, no matter how euphoric the market, nor how enthusiastic the pundits. (Where were they two years ago?)
Just remember, Fools: A rising tide can lift all boats. But the water can retreat quickly, too -- and it's only then that you see the wreckage.
At the time of publication, Seth Jayson had shares of Guess? and American Eagle Outfitters, but no positions in any other firm mentioned. View his stock holdings and Fool profile here. See what he's Digging these days. Fool rules are here.