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Something Doesn't Add Up With This Apparel Retailer's Stock

When a company tops earnings estimates, raises its dividend and boosts share buybacks, and the stock falls 30% it's time to look for a bargain, Paul Price argues.
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A shoe retailer's stock recently had a day that would make even 'Married With Children's' Al Bundy look like a winner.

But Real Money's Paul Price says that's created an opportunity for savvy investors. 

Foot Locker  (FL) - Get Free Report recently reported quarterly results.

“Earnings per share were better than expected,” Price wrote, “and revenues matched analyst expectations. Management boosted quarterly dividends by 33% and announced an additional $1.2 billion share buyback authorization.” 

So of course the shares tanked by 30%.

Okay, so what happened?

Part of the story, Price writes, has to do with investor expectations.

“After a huge runup in fiscal year 2021's profits, most analysts were looking for just a modest retracement in 2022, to about $6.85 (Value Line) to $7.56 (Yahoo Finance). Instead, in their investor presentation, management indicated a projected EPS range of from $4.25 to $4.60. In today's skittish investment climate, owners of Foot Locker immediately dumped their holdings.”

Basically, this means that Foot Locker did great in 2021, but that they expect that growth to slow down in 2022.

Investors tend to get very jittery when companies don’t meet their expectations. Often this means that they bail out at the first sign of trouble, such as when a company’s projected earnings disappoint them. Note that this doesn’t mean that Foot Locker expects its business to do poorly, just that it doesn’t expect the same degree of growth it enjoyed in 2021.

And there are a few takeaways from this. Perhaps, writes Price, the most important thing to remember is that “fiscal year 2021 was an all-time record year by a wide margin. The mid-point projection for this year is very much in line with what FL earned, on average, in the six pre-covid years from 2014 through 2019.”

In addition, "over the long haul Foot Locker's average price-to-earnings ratio has run about 12.6 times, accompanied by around 2.21% in yield." By the close of trading the day after its report, "those numbers sat at 6.6 times earnings while providing new buyers with an all-time record 5.5% current yield."

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