Stock investors are a picky and often hard-to-please group. With their money they can punish a company for mistakes and transgressions or for not performing as well as they think it should.
But in their zeal to sock it to companies that have done wrong, investors frequently oversell a stock. This is what I believe happened in two separate instances on Tuesday to stocks that deserve better…
Typically investors trade up a stock when it beats estimates. This is why the drubbing of nearly 8% that Levi Strauss (NYSE:LEVI) took on Tuesday was puzzling, at least on the surface.
The company reported its earnings for the third quarter of fiscal 2019, and the headline numbers exceeded expectations. Net revenue came in at $1.45 billion for the period, representing a 4% improvement over the same quarter last year. Non-GAAP (adjusted) net income was down but not drastically, slipping 4% to $128 million ($0.31 per share).
That top-line figure beat the average analyst estimate of $1.44 billion, while prognosticators were modeling $0.28 per share for adjusted net profit.
What seems to be bugging investors is Levi’s performance in its traditionally significant U.S. wholesale segment, which saw a double-digit drop of 10% during the quarter. Although this isn’t a shocking development given the tectonic shifts in the retail industry, it was likely a steeper drop than investors wanted to see.
American wholesale isn’t the future. Levi’s success will increasingly be dependent on hot markets abroad like Brazil and direct-to-consumer sales. It’s doing well in both respects, with good growth in Europe and Asia (up 14% and 9%, respectively), and a 10% jump in DTC net sales worldwide. The company’s famous jeans are currently in style, especially among young people, and its wares are becoming more popular abroad.
I think the market’s punishment of Levi’s Q3 results is a clear case of overreaction. It’s a good time to snap up some shares of this apparel maker.
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