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Bull of the Day: Fossil Group (FOSL)

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There is still a hint of uncertainty in the air on Wall Street, but bullish investors are looking to take firm control of certain sectors and industries as we head toward what should be a historic holiday shopping season. One retailer and product maker to play this optimism is Fossil Group (FOSL - Free Report) .

Fossil is an accessories designer, distributor, and retailer. It has several of its own brands that make products such as watches and wallets, and it also makes licensed accessories for the likes of Skechers, Marc Jacobs, and Michael Kors. You can find Fossil products in the company’s branded stores, online, and at other familiar retail locations.

It has been a difficult five years for Fossil, and the stock suffered as management fell behind on new consumer trends like wearables and smart accessories. But shares finally found a bottom in late 2017, thanks in large part to a strategic turnaround plan:

Fossil Group, Inc. Price, Consensus and EPS Surprise

Fossil Group, Inc. Price, Consensus and EPS Surprise | Fossil Group, Inc. Quote

Fossil has put the stop on its downward trend and is now looking to continue a strong rebound. Recently, investors have been buzzing about Fossil since it crushed earnings expectations last week. Now, the #1 (Strong Buy)-ranked stock looks like the ideal option ahead of the holiday shopping period.

Latest Earnings & Outlook

Fossil reported earnings of 19 cents per share for its most recent quarter, crushing the Zacks Consensus Estimate of an 11-cent loss. The company notched 30% sales growth from its connected watches and improved its gross margin by 720 basis points.

Total revenue was down due to restructuring and store closures, but the above metrics—and Fossil’s improvement to full-year guidance—were enough to see that the accessory giant’s turnaround plan is coming along well.

In the wake of this information, analysts have been moving their estimates for future periods higher:

With just one quarter left in the current fiscal year, the real key here is that estimates for the upcoming fiscal year are also trending higher. It is also worth mentioning the magnitude of these revisions, as Fossil’s full-year 2019 earnings are now expected to be nearly 60% higher than previously expected.

This rapid adjustment to the company’s forward-looking valuation. Here’s a look at how Fossil’s stock has traded in terms of its expected forward 12-month earnings over the course of the year:

Fossil is now trading at just 13.4x forward 12-month earnings—a year-to-date low and a noticeable discount to the industry average. Interestingly, Fossil has consistently traded at a premium to its industry until recently. Folks were betting heavily on its ability to rebound, but given the magnitude of its earnings recovery, it seems that shares might now be undervalued.

Perhaps the most intriguing thing about FOSL right now though is that investors have not really piled in to the stock, despite its beat-and-raise quarter and newly discounted valuation. The stock whipsawed after earnings and is now trading basically where it was prior to the report. This means there is a divergence between its share price momentum and its earnings momentum. This type of divergence is always attractive because, in the long run, share prices do tend to mimic earnings trends.

To recap, we have a company in Fossil that is on the rebound and is actively working to trim the fat, improve margins, and grow behind new technologies. Meanwhile, its stock looks cheap based on its earnings outlook, which is trending in the right direction. These are all reasons to like FOSL specifically.

But maybe even more importantly, we are heading into what should be a massive holiday shopping season, and investors are going to want to own some retailers and goods makers to benefit from that.

The National Retail Federation projects holiday retail sales in November and December—excluding autos, gas, and restaurants—will increase between 4.3% and 4.8% over 2017 to reach a total of $717.5 billion to $720.9 billion.

Fossil looks like a good bet to capture the momentum that should hit its industry over the next few months.

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