For several years now, Michael Kors (KORS) has been growing market share and interest from investors, with a stock that has risen five-fold since its IPO in late 2011. The stock is up a healthy 19% YTD, but options players betting on an earnings beat lost a lot of money today, despite the company’s 53% revenue growth and 10c EPS beat, with comparable store sales rising 30% above expectations.
All good numbers and good news, but call options crashed in value today as the stock itself has remained mostly flat in intra-day trading by lunchtime.
This points to the important aspects of investing: time-horizons must be long, market expectations and fundamentals need to be weighed against each other, and risk must be managed.
If we compare the earnings response this quarter to the earnings response in the beginning of the year, a massive discrepancy tells us that the same rules cannot be used for every quarter. In early February, the stock soared over 17% in one day on a huge earnings beat, and is currently trading a bit above the high point of 101 that the stock reached in February.
The fundamentals of the company remain strong, and the firm’s ability to take market share from competitors like Coach (COH) continues uninterrupted, but the value of the company is being considered more seriously by investors. In short, the market is deciding that a P/E of 33 is fair for KORS, while a P/E of 35 or more is too pricey.
Additionally, traders have already expected a strong beat from KORS, and they have bet on that over the past few days. While the S&P 500 is up 2% in the past 5 days, KORS is up 5%; the bullish momentum in the market generally is benefitting the apparel company, and has priced the stock to perfection before the company announced its perfect quarter.
When investing, it isn’t enough to know the fundamental value of a company; you also need to know how everyone else in the market perceives that value, and how much the market is and has been willing to pay for that value. In the case of KORS, a price ceiling was reached in February, and investors are not interested in paying more for the company’s strong earnings potential right now. Of course, this is likely to change, but investors need to understand how and why this will change before considering how much of their portfolio should be allocated to the name.