November 15, 2018
Canada Goose – Buy the Growth or Short Fundamentals?
Canada Goose (GOOS-T) has been a hidden apparel gem these past few years for investors while other apparel companies have been pressured. Yesterday’s earnings announcement confirmed why investors love this stock: increased revenue, increased net earnings, and increased margins year over year. The company has an established consumer base that is willing to spend for a premium style product.
Upon the earnings release the company quickly opened up and gained more than 21% from the previous days trading price, hitting a new 52-week high of $95.58. How ever these gains would eventually pull back and see the company close up only 9.82% at $85.09 a share.
Let me start by saying I love the growth in revenue, net income and margins which the company has created. The company continues to show growth in consumer demand with little pressure to reduce prices. In return, shareholders have been rewarded, quadrupling from a share price around $20 to $85 in just 3 years.
Evaluation is one area of concern regarding the current stock price. Today the company trades at very high price to earnings ratio (P/E) which is close to 100. The market cap of the company is above $9 billion; while revenue exceeded expectations, is still less than $1 billion. Another concern for me is the companies decision to expand into footware. Years ago Under Armour expanded product lines which increased revenue, but consequently resulted in reduced margins. Under Armour once supported a very high P/E ratio before investors re-evaluated the stock price and sent it dropping to $20/share. With other apparel companies struggling to find growth in current market conditions, competition could enter the market looking for the same success. Any new competition could result in decreased margins and revenue for Canada Goose. For these reasons I caution the further upside potential beyond $95 a share.
I believe there is lots of potential for Canada Goose to do well into the future but the fundamental upside in the stock beyond today’s share price is already materialized. The technical breakout to new highs may suggest the company could climb back to around $95/share, but purchasing the stock for further capital gains appreciation carries a high risk if investors re-evaluate the price metrics, or the company misses expectations.
Be cautious for a potential pull back to a more reasonable evaluation around $50-60/share. Selling call options or shorting above $90 may be an attractive option. At the time of writing this article I do no own a position in Canada Goose but may initiate one during trading hours.