The Police said it better than I can.

There's "too much information running through my brain." It's not "driving me insane," but it's making it hard to filter out the noise to focus on the important signals.

As promised, I'm going to give you my decision about whether to buy, sell, or hold footwear maker Deckers Outdoor (NASDAQ:DECK). Let's eliminate one choice right now. I can't justify buying without any margin of safety.

I'm glad other Fools agree. From the results of the poll, 64% of those responding said hold, 36% said sell, and no one said buy. So it seems to be a battle between hold and sell, and there's no clear-cut winner.

I stand to gain from selling, but I think that's irrelevant in the decision. It focuses too much on the outcome and not enough on the decision. So what's important in the process? I'm going to take a page from Michael Mauboussin on this one and focus on expected value vs. the current stock price.

According to his book Expectations Investing, the first thing I need to do is separate the signal from the noise and define the value triggers: sales growth, margin growth, and whether a new brand enters the fold. Those will drive cash flows higher.

Thinking about what may happen in the future, I created an expected value table based on four possible scenarios. Then I estimated the likelihood of each of those events. The goal is to find an expected value for Deckers and compare that value to the current price.

Scenario 1

Popularity for UGG boots slows faster than expected. Increased competition from Wolverine World Wide's (NYSE:WWW) Merrell, Keen, Nike (NYSE:NKE), Crocs (NASDAQ:CROX), Columbia Sportswear (NASDAQ:COLM), and others hinder the Teva comeback. Margins fall in the process, and management can't find a new brand to develop using the $100 million booty on the balance sheet.

Scenario 2

Competition continues to cause sales growth to slow, but management continues to operate the business very efficiently, keeping margins relatively high. Management still can't find a new brand that fits nicely within the mix at a fair price.

Scenario 3

Management meets it sales growth target of about 14% per year, but margin growth is relatively flat. Management purchases a new brand, which helps offset some of the slowdown resulting from UGG, Teva, and Simple maturing.

Scenario 4

Sales grow faster than expected because of new products and a new brand in the portfolio. Margins increase via operating leverage, and management continues to manage its working capital very well. Life is very good, indeed.

Putting those four scenarios into my discounted cash flow spreadsheet to estimate the value of the company, here's my expected value calculation.


10-yr FCF Growth



Expected Value

























Current Price


Let's get one thing out of the way right now. This exercise is not precise. There's error in the estimates and error in the probability, but I still believe it's worthwhile to go through the process and think about what can happen in the future. It also stresses the importance of margin of safety. Margin of safety is what protects us from ourselves when we do these analyses.

It also shows why making a single estimate about the future can be misleading. Admittedly, that's a mistake I tend to make when I work backwards from the stock price to estimate the implied growth rate. I tend to forget that that represents one possible scenario out of many. Shame on me, I know. I'm working on it.

So, are you ready for my conclusion? I plan to hold but will sell if I find a good opportunity with a more attractive margin of safety. Deckers makes good products, has a great management team, and generates excellent returns on invested capital and lots of cash. The price isn't attractive today, but it's not as out of whack as I estimated earlier.

For more on Deckers Outdoor, check out:

Deckers Outdoor is a former Motley Fool Hidden Gems recommendation, while Columbia Sportswear is a current recommendation. To find out how small caps can give your portfolio a big boost, simply sign up today for your free 30-day trial.

Retail editor David Meier loves his new Teva sandals, and his wife loves her Teva running shoes. He owns shares of Deckers Outdoor and Nike but does not own shares in any of the other companies mentioned. He is currently ranked 703 out of 25169 investors in The Motley Fool's CAPS rating service. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.