The apparel and accessories industry has had a sluggish performance in 2018 and few companies have managed to deliver good growth in revenues and margins. Steve Madden (SHOO, Financial) is one of those few names.
As the date of its results of the fourth quarter of 2018 approach, the stock is gaining excellent momentum, and it is likely that the company will produce another stellar performance, beating expectations like it has for the past eight quarters. The stock is trading at a reasonable valuation despite the recent climb and there appears to be an interesting buying opportunity for short-term traders as well as long-term investors.
Steve Madden has been an all-round performer
The third quarter of 2018 was a rare quarter for Steve Madden, with management reporting revenues marginally below analyst estimates. The company had overall revenue growth of 3.9%, which is fairly decent given that the apparel and accessories segment has been having flat to negative growth of late.
Earnings per share of 65 cents managed to beat analyst expectations by 4 cents, which is remarkable given that the industry is facing rising operating expenses, increasing competition and trade war tailwinds resulting from the imposition of tariffs. As a result of this outperformance, the stock continues to have a GuruFocus rating of 8/10 for Profitability & Growth and 9/10 for Financial Strength.
The two main pillars of Steve Madden’s growth are its wholesale business and its international growth. Even in its third-quarter results, the company reported 24% growth in international sales including good performance in its subsidiaries in Canada and Mexico and its SM Europe joint venture. Management is focusing its attention on the Middle East, India and other Asian markets to enhance the quality of this growth.
With respect to its wholesale business, the company has been doing well in handbags and other accessories business while manufacturing for private labels, Anne Klein, and others. E-commerce sales are also showing good growth, and the company is demonstrating good all-around performance in each department.
Why Steve Madden stock works for short-term and long-term investors
As shown in the three-month chart, Steve Madden’s stock gained a reasonable amount of momentum prior to the result. The current market price of the stock is well above its five-day, 10-day, and 20-day weekly moving averages. This applies to both the simple moving averages as well as the exponential moving averages and is an excellent buy signal for short-term traders. Interestingly, the 14-day Relative Strength Index of the stock is about 49.397, which is not within the overbought zone, nor is its Stochastic Oscillator at about 52.035. This implies that there is certainly more potential for the stock to rise in the short term.
For medium-term and long-term investors, the biggest positive sign associated with Steve Madden is that its fundamentals are exceptionally strong. The company is debt-free and has an operating margin of 11.26%, which is above industry peers. Its net margin of 8.79% is a highly reliable number given that the Beneish M-score is -2.68, clearly indicating that the chances of window dressing are minimal.
Two other metrics measuring the fundamental strength of Steve Madden through the Altman Z-score (10.60) and the Piotroski F-score (a near-perfect 8) are also exceptionally high, re-emphasizing the company’s fundamental strength. To add to this, the stock is trading above the 50-day, 100-day, and 200-day monthly moving averages, which means that there is good long-term buying momentum in Steve Madden.
Conclusion
Timing is one of the most critical elements for any form of investing, and the best time to enter a winning stock is when it is gathering momentum and readying itself for a good result. Steve Madden falls exactly within that zone as of today. The company is trading below its 52-week high, which it might end up crossing if the results are good enough. It is worth mentioning that gurus Joel Greenblatt (Trades, Portfolio) and Hotchkis & Wiley have been actively carrying out short-term trades in the stock. Overall, Steve Madden should prove to be a winner for both short-term as well as long-term investors.
Disclosure: No positions.
