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Weekly Contrarian: Do Bears Look Good in Coach?


Reviewing the sentiment backdrop in Coach after earnings.

Coach, Inc. (COH) has been snagged, fundamentally speaking. In its recent fiscal fourth-quarter showing, Coach topped earnings expectations, but failed to meet top-line views. "Most distressing," the author suggested, was the much lower-than-expected 1.7% same-store sales growth in North America. Even the impressive 60% same-store sales out of China "couldn't make up for domestic sluggishness, as North America is still the company's most important region, accounting for most revenue." The maker of fine accessories also disappointed investors and analysts with planned acquisitions in Asia in 2013, as well as a larger push into men's accessories and specialty shops. Coupled with uncertainty about "sales trends and consumers' strength," many investors see these actions at odds with each other. Although it may seem to be a good time to snatch up Coach at a bargain, the current climate may dictate a lower road for the shares.

Contrarian Takeaway

Following Coach's fiscal fourth-quarter report yesterday morning, Wall Street reacted harshly and knocked the shares down some 20.6%, sending the stock south of the $50 mark. This level had previously acted as support since last October 2010, containing all but a handful of daily closes since then. Upon publication of this article, the shares were trading under $50, and were looking at a year-to-date deficit of more than 19%.
There appears to be plenty of negativity surrounding Coach. Short interest surged nearly 81% during the past two reporting periods, and it now makes up a healthy 5% of the equity's available float.

Short-term options players seem pessimistic as well. Coach's Schaeffer's put/call open interest ratio ("SOIR") of 2.67 indicates that puts more than double calls among options slated to expire within three months. This ratio ranks in the 90th percentile of its annual range, suggesting short-term options players have rarely been more put-heavy during the past year.

Surprisingly, however, the brokerage bunch is upbeat toward this underachiever. The average 12-month price target sits at $74.28, which represents a significant 50.6% premium to July 31's close of $49.33. What's more, there are 16 "strong buys" and two "buy" endorsements, compared to five lukewarm "holds" and no "sells." This bullish configuration leaves the door wide open for price-target cuts and/or downgrades. In fact, on the heels of Coach's revenue miss and plans for fiscal 2013, Baird, UBS, Barclays, Nomura, and Deutsche Bank were among the analysts to lower their positions on the luxury goods retailer.

Over the past three months, Coach has underperformed the broader S&P 500 Index (SPX) by 32 percentage points. An unwinding of bullish sentiment among brokerages, or further selling activity among short sellers and options players, could prove troublesome for Coach, especially in the near-term.

This article by Jim Cunningham was originally published on Schaeffer's Investment Research.

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