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Can Skechers Recover From Missteps?

Stocks in this article: SKX

NEW YORK ( TheStreet) -- Sometimes net/nets are able to turn things around.

Net/nets are stocks that trade for less than their net current asset values. Sometimes stocks end up in this predicament because of bad business moves, a rough economy, intense competition or even obsolescence.

Some of these companies never recover. But others are able to right the ship. If you can correctly identify the latter stocks, and have the stomach to endure the roller-coaster ride often involved with owning such names, you could be richly rewarded.

Footwear company Skechers (SKX) is a great example, but it's still a work in progress.

Skechers was a victim of the insane markets we experienced in early 2009. It traded below net current asset value for a while before it embarked on an incredible run between April of 2009 and June of 2010 that saw shares soar from $6 to $44.

But following that amazing recovery, the company's missteps brought the stock crashing back to earth. By early January 2012, much of the earlier gain had vanished, and shares traded for less than $12. The fall from grace was primarily due to Skechers' "Shape-ups" line of sneakers, an unmitigated disaster that led to lawsuits and growing inventories.

Demand for the shoes, which promised health benefits to those wearing them, was weak, and the company was left with a boatload of unwanted product. Ultimately, Skechers dumped the inventory, while investors dumped their positions in Skechers.

Although the company has not yet returned to profitability, the markets have warmed up to the stock, and shares are now back near the $20 level -- up more than 60% year to date. Despite negative bottom lines for the first two quarters of 2012, the losses have been much lower than analysts' consensus estimates.

Inventories have fallen. Second-quarter inventory was down more than 20% vs. the same period last year. Consensus estimates for the third quarter are calling for revenue of $435.3 million, and earnings of 32 cents a share. We'll know more on Oct. 24, when the company is scheduled to report third-quarter earnings.

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