Although trendy fashion retailer Guess (GES) prints red ink for the year so far, GES stock seemingly presents a viable upside proposition for contrarian speculators. As Barchart contributor Rick Orford rightfully points out, the underlying economy has been resilient. One only needs to look at the May jobs report where the labor market printed a much stronger figure than experts anticipated.
By logical deduction, Orford stated that because the employment arena continues to be robust, “…consumers feel comfortable with increasing their spending, which plays a significant role in [the consumer discretionary] sector.” For those that want to take a swing at the bat, GES stock offers another compelling reason for speculation: passive income.
At the moment, Guess carries a forward yield of 6.15%, which is substantial. Keep in mind that the consumer discretionary sector’s average yield sits at 1.89%. At first glance, such an overly generous rate might yield suspicions of a high-yield trap. However, the payout ratio undergirding the dividend is only 40.23%. On the surface, this metric offers credibility that the yield is sustainable.
Certainly, it’s possible that GES stock could move higher based on the broader speculative fervor that dramatically impacted the retail investor community. However, some brewing signs suggest that less-aggressive market participants should adopt a cautionary approach.
Options Traders Aren’t Biting on the Bullish Take for GES Stock
One point of hesitation for Guess is a lack of conviction in the derivatives market. Following the close of the June 29 session, GES stock represented a key highlight in Barchart’s screener for unusual stock options volume. Specifically, total volume hit 13,047 contracts against an open interest reading of 35,919. Further, the delta between the Thursday session volume and the trailing one-month average metric came out to 708.36%.
Drilling down, call volume mustered 5,372 contracts while put volume jumped to 7,675 contracts. This pairing yielded a put/call volume ratio of 1.43, which implies a significant tilt toward pessimistic sentiment. Per Barchart, the put/call open interest ratio comes in at 1.17, which again implies a bearish slant.
If that wasn’t enough, options flow data from Fintel indicates that for the month of June (so far), volume for bearish options transactions reached 15,120 contracts while bullish transactions came out to 13,592 contracts.
As a point of contrast, analysts peg GES stock a consensus moderate buy, breaking down as two strong buys and two holds. Further, the experts have a mean price target of $23.50. Given the closing price of $19.52 on Thursday, GES may have upside potential of over 20%. That’s not bad per say. However, with the risk that investors would be absorbing, prospective buyers will want to conduct careful research.
Economic Narrative Not Quite Bullish Enough for Guess
Back when the COVID-19 crisis first capsized global society, it was only normal for investors to assume the worst. With commercial activity almost grinding to a halt, many fretted about an incoming apocalypse. However, critical bipartisan deals amid the rancor in Washington helped the U.S. get quickly back on track. Now, policymakers face the difficult task of slowing the economy to cool the ravages of inflation.
As stated earlier, the May jobs report didn’t help, with the economy adding 339,000 new employment opportunities. However, the nuances of the report should give investors – particularly those thinking about discretionary plays like GES stock – some pause.
First, the unemployment rate ticked conspicuously higher to 3.7% from a five-decade low of 3.4% in April. It’s also the highest such reading since October. Second, the length of the average work week declined as did the pace of wage growth. Combined with other datapoints, this framework suggests that employers just aren’t as motivated to entice prospective employees with higher wages.
In addition, credit card debt stands at a record high this year, a dilemma that I’ve been harping on for quite some time. To be sure, GES stock gained more than 14% in the trailing year, which indicates that fundamental rumblings don’t necessarily impact equity valuations immediately. However, in many if not most cases, the fundamentals eventually matter.
For GES stock, the underlying business doesn’t offer a compelling reason to attract demand under trying circumstances. At the end of the day, apparel is just apparel – something that can be acquired from just about anywhere.
Also, while GES stock may be considered undervalued trading at a forward multiple of 7.48, the top line appears to be fading. Currently, Guess runs a trailing-12-month revenue of $2.66 billion, down roughly 1% from the $2.69 billion posted for the fiscal year ended January 2023.
On some level, I can appreciate the dividend and the discount to projected earnings. Simultaneously, the declining growth in the top line corresponds with a weakened consumer economy. At best, I’d wait for some more data before taking a position in GES stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
