To make money, said Warren Buffett, you have to wait for a fat pitch.
In baseball, a fat pitch is the kind of easy toss any batter can hit. You have only three strikes in baseball, whereas in investing, you can wait as long as you want until Mr. Market pitches you a stock so cheaply that you can thwack an easy home run.
In my experience, some of the best fat pitches are of companies that depend on periodic fads. When the fad fades and the stock wilts, it can often be bought before the next fad hits. If you buy at the right point, you can have a multi-bagger on your hands.
Such a stock may be Skechers USA Inc. The company makes shoes, sneakers, boots, and all other manner of footwear. Most of the business is non-trendy, but every few years a shoe fad comes along. This periodically boosts Skechers' revenues and carries its stock heavenward.
Of course, the fad invariably ends, and the stock then crashes - as is happening now. The current crash is based on the latest fad in the company's product line: "Shape-ups" and "Tone-ups," sneakers that force the wearer to wobble and work harder to stay stable, thus toning his or her (usually her) posterior end.
Because many North Americans consider their posteriors sub-optimal, the enthusiasm for the shapers and toners has been dramatic. The stock, as a result, soared from about $6 (U.S.) in March, 2009, to $44 in June, 2010 - a seven-bagger in about a year.
Then, consumers' enthusiasm waned. Some began to complain that their posteriors were not becoming as becoming as they had hoped; the fad melted, and with it, investors' expectations. The stock melted also, and is now close to $17.
How low can it go? No one knows for sure, but it is useful to note that Skechers has gone through three such boom-bust cycles and always survived because the company still has a steady, non-fad business.
In all previous cycles, the stock always bottomed between $4 and $6, and peaked at between $35 to $40-ish.
Will it do it again? No one can tell. But if the stock falls to $6 yet again, and if your due diligence shows the company isn't about to go under, you might then consider buying it all the way down to $4, and wait a year or two (or three) to sell it at a multiple of your purchase.
There are two obvious questions: First, how sure are we the stock will get to $6 or below? And second, if the stock is now at $17, why not short it first?
The answers: First, we can't know if it would fall below $6 yet again, just because it did so in the past. I think it might, but there's no certainty.
Second, shorting involves higher risk. The stock may first pop significantly higher, before falling to $6, and the drawdown may rob you of sleep.
But if it does fall as it did before, how fast can it get there? The last two plunges, peak to trough, each took two years - the duration of a shoe fad. We are now one year into this plunge, so we may have about a year to go.
It's useful to recall the four requirements for hitting a home run on a fat pitch:
(1) Choose the right company that goes from boom to bust and repeats the process. I think we have one here.
(2) Be patient and willing to wait for the right price. It may take up to a year now.
(3) Be unashamed to insist on a very cheap price. Here, we insist on buying below $6.
(4) Be willing to miss the stock if the price has not fallen low enough.
What of valuation based on book value, EPS, and cash flow?
Please recall that the driver of Skechers' marginal earnings is their customers' desire for posterior shapeliness. Once this fades, estimates fly out the window.
The stock could now fall to its non-fad base. If it gets there, you'll have your fat pitch. How soon? Again no one knows. But isn't a multi-bagger worth waiting for?