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TheStreet Open House

Coach Worth Close Look After Revenue Miss

NEW YORK ( TheStreet) -- If you're a current Coach (COH) investor Tuesday's earnings release must have felt like arriving at your vacation destination and learning your luggage was lost.

Coach's shareholders ran for the exits causing an 18% opening gap lower from Monday's closing price. Coach is nearly unchanged from a year ago but remains in a bearish trend on the daily chart.

Not everything contained in the earnings release was negative. Margins improved, sales in Asia increased and company-owned same-store sales in North America improved.

Coach announced the reinstatement of coupons last month in a bid to shore up revenue. Discounting is never considered fashionable by investors and Wall Street made its disappointment loud and clear.

Stocks with a price-to-earnings ratio under 15 have historically outperformed the market. However, in today's market environment of expanding profitable companies trading at or near single digit price-to-earnings multiple, a multiple of 15 isn't quite the value it once was.

I believe the panic selloff is overdone. Analysts estimated earnings at 85 cents per share, a gain of 17 cents (20%) from 68 cents during the corresponding quarter last year. Coach actually beat the estimate by a penny to come in at 86 cents per share.

Revenue was a slight miss at $1.16 billion, rising 12% over last year, albeit less than the $1.2 billion investors looked for. Considering the coupons, and the close revenue achievement combined with a beat on earnings, I don't see Coach continuing downward for long.

Based on my experience with gaps down similar to Coach, investors will likely see the short-term low Wednesday. With Tuesday's opening price within 1 cent of the low, additional downside pressure probably won't last long.

COH Chart COH data by YCharts

Bargain hunters and the few short sellers covering positions could push the price up over $55 by the end of the month. The current float short is small and not a big concern, plus they provide fuel for Coach to appreciate again. Short interest is 4.9%.

Looking at the chart, I expect short-term resistance near $55. Round numbers often attract like a price magnet and repel, causing a bounce. Expect a lot of volume to trade near $50 a share on Thursday, but also expect bargain hunters to start positions under $49 as an entry.

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