(B)(N) VFC VF Corporation & The Gatsby Collection

Drama. There’s a strong wind blowing through the market and they say that the next big thing is “high-end consumer discretionaries” which covers a lot of ground from food, coffee, juice, jeans, yoga, and shirts to watches and automobiles, deja vu and more, and that notion is supported by alleged earnings growth that exceeded analysts’ expectations last year and might continue, they think (Minyanville, May 30, 2013, Starbucks, Home Depot, Chipotle, More: Consumer Discretionary Stock Valuations Too High and MarketWatch, May 8, 2013, IPO market hot again for consumer discretionary stocks?).

Berkshire Cotton Mills, Adams, Massachusetts, 1889

We think that the market pundits are reading yesterday’s news as if it’s going to happen again, and are discounting the commonplace that real millionaires prefer Berkshire Hathaway, which tailored shirts and was dressed for success more than fifty years ago, and Wal-Mart, which sells everything but tailors nothing, also successfully (Insight, June 6, 2013, Canadian millionaires love to shop at Wal-Mart).

But three companies have been further distinguished by The Street as The Gatsby Connection (The Street, June 8, 2013, Cramer Likes ‘Old Tech’) and they have a limited profile in Canada, and so it seems prudent to check our “belts and braces” lest we suffer a wardrobe malfunction in the upcoming “flight to quality & the bespoke”.

The most attractive from our point of view is VF Corporation (please see Exhibit 1 below) but Ralph Lauren is hard working, and Michael Kors Holdings has been spectacular since its IPO two years ago (CNNMoney, December 15, 2011, Michael Kors shares close up 21% in debut). Please see Exhibit 2 and 3 below.

VF Corporation has a market capitalization of $20 billion and will pay $380 million in shareholder dividends this year for a current yield of 1.9% and $0.87 per share per quarter. It’s trading at $187 and well-above the current Risk Price (SF) of $132 and rising.

The demonstrated volatility in the stock price in minus ($15) per share, which we can afford, but the options market is quite full and we can buy the August put at $185 for $6.50 today and sell an offsetting call at $195 for %4.40 so that for the cost of holding the stock at $187 and the collar at $2.10 ($6.50 less $4.40) which we can pay for out of our profits, we can continue to hold this stock for the next several months without worry.

The price is up +50% in the past year, and +30% this year and based on their brands and sales of $10 billion with a net profit margin of 10% ($1 billion), if we’re not wearing them, what are we wearing? Please see below.

Exhibit 1: (B)(N) VFC VF Corporation – Risk Price Chart

(B)(N) VFC VF Corporation

VF Corporation is an apparel and footwear company. It designs and manufactures or sources from independent contractors a variety of apparel and footwear for all ages.

(Please Click on the Chart to make it larger if required.)

From the Company: V.F. Corporation designs and manufactures, or sources from independent contractors various apparel and footwear products primarily in the United States and Europe. The company offers outdoor adventure-oriented, skateboard-inspired, surf-inspired, and outdoor gear footwear and apparel products; and handbags, backpacks, accessories, merino wool socks, luggage, packs, travel accessories, and women’s active wear under The North Face, Timberland, Vans, Kipling, Napapijri, Reef, Eastpak, JanSport, SmartWool, lucy, and Eagle Creek brands. It also provides denim and casual bottoms, and tops under the Wrangler, Lee, Lee Casuals, Riders, Rustler, and Timber Creek by Wrangler brands, as well as fashion denim and sportswear under the Rock & Republic brand. In addition, the company offers occupational, protective occupational, athletic, licensed athletic, and licensed apparel products under the Red Kap, Bulwark, Horace Small, Majestic, MLB, NFL, and Harley-Davidson brands; and fashion sportswear, denim bottoms, sleepwear, and underwear, as well as handbags, luggage, backpacks, and accessories under the Nautica and Kipling brands. Further, it provides premium denim and casual bottoms, sportswear, and accessories, as well as premium women’s sportswear under the 7 For All Mankind, Splendid, and Ella Moss brands. The company sells its products to specialty stores, department stores, national chains, and mass merchants, as well as sells through company operated stores and e-commerce sites. V.F. Corporation was founded in 1899, has 57,000 employees, and is headquartered in Greensboro, North Carolina.

Ralph Lauren Corporation has sales of about $7 billion and a similar margin to VF Corporation with profits every year. We held it during the growth spurt in 2009 to 2011 between $50 and $140 (please see Exhibit 2 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF), and for no other reason) and started buying it again at $163 late last year.

It’s trading now at $175 and our estimate of the downside volatility in the stock price is minus ($15) per share which means that it could be trading between $160 and $190 without surprise.

We’re holding the July put at $170 for $3.20 per share and have sold the July call at $180 against our long position for $3.50 per share for a net gain of $0.30 ($3.20 less $3.50) per share on the collar. The expected dividends are $0.40 per share per quarter for a payout of $100 million this year and, despite that, a meager yield of less than 1%.

Exhibit 2: (B)(N) RL Ralph Lauren Corporation – Risk Price Chart

(B)(N) RL Ralph Lauren Corporation

Ralph Lauren Corp designs, markets, and distributes men’s, women’s and children’s apparel, accessories, fragrances, and home furnishings.

(Please Click on the Chart to make it larger if required.)

From the Company: Ralph Lauren Corporation engages in the design, marketing, and distribution of lifestyle products. It offers apparel products, including a range of men’s, women’s, and children’s clothing; accessories comprising footwear, eyewear, watches, fine jewelry, hats, belts, and leather goods, such as handbags and luggage; home products consisting of bedding and bath products, furniture, fabric and wallpaper, paint, tabletop and giftware; and fragrance products. The company sells its products primarily under Polo Ralph Lauren, Purple Label, Ralph Lauren Women’s Collection, Black Label, Blue Label, Lauren by Ralph Lauren, RRL, RLX Ralph Lauren, Denim & Supply Ralph Lauren, Rugby, Ralph Lauren, Ralph Lauren Childrenswear, American Living, Chaps, and Club Monaco brand names. Ralph Lauren Corporation sells its products through department stores, specialty stores, golf and pro shops, as well as company owned and licensed retail stores, and concessions-based shop-within-shops, and e-commerce Websites. The company also sells its apparel, home, and other products through licensing alliances. As of March 31, 2012, the company operated 379 retail stores, 474 concessions-based shop-within-shops, and 6 e-commerce Websites. It has operations in the Americas, Europe, and Asia. The company was formerly known as Polo Ralph Lauren Corporation and changed its name to Ralph Lauren Corporation in August 2011. Ralph Lauren Corporation was founded in 1967 and has 14,000 employees and is based in New York, New York.

Michael Kors made its debut in New York at $24.25 in December 2011 and ran to $48 by the Spring of 2012. We picked it up at $44 later in the year and were called out at $54 six months later. It doesn’t pay a dividend, has sales of about $1.4 billion with a 10% net profit margin, and is trading at the Risk Price (SF) of $62 which would cause us to wait, at least for now, and see how the price matures, so to speak.

Our estimate of the downside volatility in the stock price is minus ($7.50) so it could be trading between the current $62 and $55 and $69 during the next several months.

Exhibit 3: (B)(N) KORS Michael Kors Holdings Limited – Risk Price Chart

(B)(N) KORS Michael Kors Holdings Limited

Michael Kors Holdings Limited designs, markets and distributes women’s apparel and accessories and men’s apparel. It operates in three business segments namely retail, wholesale and licensing.

(Please Click on the Chart to make it larger if required.)

From the Company: Michael Kors Holdings Limited engages in the design, marketing, distribution, and retail of branded women’s apparel and accessories, and men’s apparel. The company sells its products primarily under the names of Michael Kors, MICHAEL KORS, MICHAEL MICHAEL KORS, and KORS MICHAEL KORS. It operates in three segments: Retail, Wholesale, and Licensing. The Retail segment engages in the sale of women’s apparel; accessories, which include handbags and small leather goods, such as wallets; women’s footwear; and licensed products comprising watches, fragrances, and eyewear. As of March 31, 2012, its retail segment had 191 retail stores, including concessions in North America; and 46 international retail stores comprising concessions in Europe and Japan. The Wholesale segment sells accessories, which include handbags and small leather goods, such as wallets; footwear; and women’s and men’s apparel to department stores and specialty shops in North America and Europe. This segment has 2,027 department store and specialty store doors in North America; and 650 international department store and specialty store doors. The Licensing segment licenses its trademarks on products, such as fragrances, cosmetics, eyewear, leather goods, jewelry, watches, coats, footwear, men’s suits, swimwear, furs, and ties, as well as licenses rights to third parties to sell the company’s products in geographical regions, including Korea, the Philippines, Singapore, Malaysia, the Middle East, Turkey, China, Hong Kong, Macau, and Taiwan. The company was founded in 1981 and has 6,400 employees and is based in Tsim Sha Tsui, Hong Kong.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond™“
Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.Disclaimer Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.