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Were Fossil Group Inc (FOSL)’s 63% Q1 Gains Just the Tip of the Iceberg?

Fossil Group Inc (NASDAQ:FOSL) was one of the top performing stocks on the Nasdaq in the first quarter, jumping by 63.5%. Much of that love from the market came on none other than Valentine’s Day, when the stock was lavished with gains of 87.7%. Since then however, shares have fallen by 25.7% and robust short interest (over 35% of shares are being shorted as of March 26) continues to weigh down shares, which fell by 70% in 2017.

Are Fossil Group shares poised for further gains, or was it simply a one-off short squeeze that spurred their first-quarter surge? In this article we’ll take a look at one of the bull cases made for the stock back in mid-February, just days after its Valentine’s Day jump and examine how the stock stands in comparison today.

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The Bull Case for Fossil Group Inc (NASDAQ:FOSL): Over at Value Investors Club (VIC), Fossil Group was pitched on February 17 by manatee, three days (two trading days) after the release of the company’s fourth-quarter results, which soundly beat estimates. The licensor and seller of luxury watches, smartwatches, jewelry, and leather goods, lost $0.39 per share during the quarter, which seems somewhat disastrous, but was actually far better than the market had anticipated (a loss of $0.64 per share).

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While Fossil Group is currently dealing with a number of headwinds that will continue to weigh on its results throughout 2018 (the company has predicted a sales decline of as much as 14% this year), manatee believes that there is reason for optimism that shares could be substantially undervalued should the company execute its turnaround well, which includes closing unprofitable retail stores.

A huge investment in its smartwatch segment (which doubled sales in 2017 to $300 million) was also cited as hugely important. The smartwatch industry is expected to nearly double in size by 2020, to $32 billion, so there’s potential for a further doubling of sales in the near future should Fossil Group simply hang on to its current market share of about 1.7%, and much more should it be able to grow its share of the burgeoning market, which it’s gotten a late start on.

Despite its flagging revenue and EBITDA, it was also noted that Fossil Group Inc (NASDAQ:FOSL) remains a solid generator of free cash flow (FCF). That figure stood at $155 million in 2017, giving it a gigantic free cash flow yield (FCFY) of over 24% based on its current market cap. It was estimated that Fossil Group will manage to deliver between $70 million and $120 million in FCF over the next two years, or greater than 10% FCFY, and that its margins (which fell to less than 1% last year) should rebound by several percentage points in the coming years.

Insider Buying at Fossil Group Inc (NASDAQ:FOSL) Picks Up: A renewed interest in the stock by insiders was also cited in the VIC pitch as a positive sign, and for good reason. Research has shown that clusters of notable insider buying activity lead to outsized returns on average, with such trades accounting for as much as half of insiders’ market outperformance, which has averaged over 11 percentage points annually.

However, that cluster of insider buying, which was lead by executive vice president Gregory McKelvey’s purchases of over 150,000 shares, are now several months old and with the stock having risen by as much as 100% since those purchases, it’s unclear how confident Fossil Group insiders are based on the stock’s current price.

While CEO Kosta Kartsotis has sold over 400,000 shares in the last month, those transactions were all noted as being for personal tax planning purposes (which highlights why insider sales should not be given much weight). The chairman and CEO still owns over 3.37 million shares of the company that he co-founded with his brother Tom in 1984.

Hedge Fund Ownership of Fossil Group Inc (NASDAQ:FOSL): At Insider Monkey, we track the stock picks of over 600 of the most successful hedge funds in the world to uncover actionable patterns and profit from them (free samples of our premium newsletters are available).

In the case of Fossil Group Inc (NASDAQ:FOSL), 16 hedge funds in our database were long the stock at the end of 2017, owning 15.8% of its float valued at $59.49 million. That was an increase from 14 hedge funds long the stock at the end of September 2017. Among the funds opening new Fossil Group positions ahead of its 2018 surge were Jim Simons‘ Renaissance Technology (199,500 shares), Dmitry Balyasny’s Balyasny Asset Management (566,442 shares), and Neil Chriss’ Hutchin Hill Capital (79,651 shares).

Conclusion: Fossil Group is a compelling stock that continues to shed some of the gains from its recent short squeeze (down by 15.7% since the VIC pitch was made). Despite the voluminous gains this year, shares nonetheless remain priced rather cautiously, with far more upside potential than downside risk.

Disclosure: None

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