BALTIMORE (Stockpickr) -- You don't have to be a fashionista to see the benefits of owning apparel stocks.
Even though clothing and apparel stocks tend to have much more exposure to consumer whims than most consumer cyclicals, the flip side of that coin is the fact that apparel investments can outperform the market significantly when consumer spending ramps higher. That's especially true around the holidays, when clothing tops many Americans' gift lists. (Last year, for example, the apparel industry saw its holiday season sales hike nearly 10% higher.)
But that potential for volatility puts a big target on the backs of apparel manufacturers and retailers -- and that can create a prime opportunity for investors to profit from a short squeeze.
In case you're not familiar, a short squeeze is the buying frenzy that ensues when a heavily shorted stock starts to look attractive again to investors. As more and more of the short investors buy shares to cover their positions, share prices skyrocket. Almost anything can trigger a short squeeze, including trumping earnings expectations, winning a lawsuit, unveiling a new product and even announcing a management change.
One of the best indicators of just how high a short-squeezed stock could go is the short-interest ratio, which divides shares short by average daily trading volume in order to get a ballpark estimate of the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed.
Naturally, these plays aren't without their blemishes -- there's a reason that these stocks are being heavily shorted. But for investors looking for exposure to a speculative play with a beefier risk/reward tradeoff, these could be powerful upside plays for the coming year.
With that, here's a look at a handful of
2012 Stock Predictions and Outlook
Small-cap sportswear maker
is a perfect example of a heavily shorted apparel firm worth looking at for long investors.
It's been a challenging year for Columbia: in 2011, shares of this firm have slid more than 21% as one of the warmest winters of history tempered investor expectations over this outerwear-centric business. Even though it's hardly been a banner year for Columbia, this brand has the right positioning to make a move higher into 2012.
While competition is fierce in the sportswear category, Columbia's established brand name gives the firm advantages over less recognizable peers. At the same time, the firm has been finding growth in its Mountain Hardwear, Sorel, and Montrail labels -- offerings that are starting to prove popular abroad. Even though the U.S. market is fairly cramped, overall consumer spending increases have the potential to lift all ships in this low-tide market.
From a financial standpoint, Columbia is in excellent shape. The firm has a debt-free balance sheet and has been aggressively paying out dividends to shareholders. That's thanks in large part to the fact that this family-managed business is still 63% owned by the Boyle family. That aligns management's interests with those of outside shareholders.
In the meantime, a short interest ratio of 10.8 means that it would take more than two weeks of buying for shorts to exit their positions at current volume levels.That makes Columbia a prime candidate for a moderate short squeeze.
Iconix Brand Group
Iconix Brand Group
is a small-cap apparel stock that's seen its shares slide more than 14% so far in 2011. When short-sellers smell blood in the water, they tend to pounce -- and pounce they have, ratcheting Iconix's short ratio up to 11.1.
Despite that shorting, there's reason to pay attention to the other side of this trade right now.
While it's outwardly been a difficult environment for clothing manufacturers, some firms have been faring better than others. Iconix, for instance, has increased its revenue during each year of the recession, increasing sales by 108% between 2006 and the end of fiscal 2010. This year, the firm is on track to deliver double-digit growth once again.
Iconix is primarily a licensing firm, eschewing manufacturing and sticking to the higher-margin side of the apparel business. Clothing brands in the firm's portfolio include well known names such as Candie's, Mossimo, Joe Boxer, and Badgley Mischka.
Iconix has slowly been chipping away at its debt load over the last few years, while building up a more comfortable cash position at the same time. That's provided the firm with an overall liquidity boost that investors should be appreciating right now.
The firm's fourth-quarter earnings call in early 2012 could be a strong catalyst for a squeeze in share prices.
has only been public for a year and change, this $1.4 billion stock has gotten plenty of eyes on it. Management took advantage of significant popularity in VRA's product line to IPO the firm -- but there's still value in this name.
Short-sellers' eyes are on Vera Bradley too; with a short ratio of 14.4, it would take nearly three weeks of buying for shorts to exit their positions at current volume levels.
Vera Bradley has an instantly recognizable style, something that the firm has done a good job of leveraging in the last few years. Today, VRA sells women's accessories through more than 3,300 independent retailers as well as a growing contingent of company-owned retail stores. The latter should provide VRA with considerable room for domestic growth while most peers are struggling to establish their brands abroad.
If imitation is the sincerest form of flattery, then Vera Bradley should be quite flattered -- competitors have been quick to copy the firm's signature style. To date, they haven't been able to copy VRA's success. Authenticity counts in the apparel business, and Vera Bradley's first-to-market status should help the firm retain the edge on competitors who want part of its broad demographic.
Financially, VRA carries a manageable revolving debt load that's been shrinking as the firm simultaneously builds a more suitable cash reserve. Deep margins should keep that trend moving along in 2012.
Sporting goods retailer
, one of TheStreet Ratings'
, is another example of a stock with apparel exposure that's being heavily shorted right now. CAB's short interest ratio of 13.1 indicates that it would take nearly three weeks for shorts to cover. Growth has been slowly ticking higher for each of the last five years, and margins remain on the high end for a pure retail name.
While an aggressive acquisition strategy has increase the firm's total debt load considerably in the last couple of years, the strategy has also increased Cabela's overall scale. As a result, ratios remain strong, and long-term debt has actually been on the downslope for the last several quarters.
An especially strong brand among sportsmen should keep sales strong in CAB.
Casual apparel retailer
operates 420 stores in 41 states, as well as an e-commerce presence at its eponymous site. Because this firm primarily targets the younger demographic, sales are largely dependent on buyers' abilities to target new apparel trends earlier than the competition -- a factor that ramps up the risk/reward proposition for Buckle.
Historically, the firm has enjoyed enviable pricing power, resulting in deep margins despite the fact that BKE is a pure retailer. That's an advantage that investors shouldn't discount going into the holiday season.
The Buckle's short interest ratio currently weighs in at 11.4.
To see this week's short squeezes in action, check out the
-- Written by Jonas Elmerraji in Baltimore.
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At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.