I Still Think I've Got a Leg Up With Caleres. Here's Why

Sometimes markets become so crazy that you can find no reason to understand pricing on certain individual stocks.

Shoe designer, distributor and retailer Caleres (CAL) now falls into that category.

There is nothing wrong with the company's fundamentals. In fact, management already revealed that fiscal fourth-quarter results, due out Tuesday, should lead to about $4.05 in earnings per share for the year ended Jan. 29.

That number would exceed CAL's previous record of $2.21 per share by an enormous 83.3%. Logic would dictate that Caleres shares should be fetching new record highs, as well. Instead at last week's closing quote of $19.65, CAL is barely above where it sat nine years earlier after posting just $1.13 in EPS.

That's quite disappointing for very long term buy-and-hold types, but music to the ears of those looking to set up new positions in CAL.

So much already created value is in the stock that a large "catch-up" move higher appears inevitable over time.

What is Caleres really worth?

A glance at the data below show the stock offered exit opportunities at from $28.70 to $41.10 during each of the six years stretching from 2013 through 2018. Sales, cash flow and earnings per share back then were all just a fraction of fiscal 2021's levels.

CAL is available at a lower multiple today than at any of its five previous "best entry points" (green-starred below) over the past decade.

The pre-Covid years 2012 through 2019 saw CAL revolve around 13.9-times earnings.

Its three "should have sold" moments (red-starred) all reflected well above average price-to-earings along with sub-par, vs. normalized, yields.

Management has held the 7 cent quarterly dividend steady since 2007, preferring to dedicate cash flow more toward share buybacks. Even so, at CAL's present quote, the current yield is a reasonable 1.42%. Note, too, that the yield was maintained right through the Covid-crisis when many other firm's eliminated quarterly payments to conserve cash.

Assume only a partial valuation reversion toward the mean to 13-times this year's estimate, and CAL could easily exceed $52 by this time next winter. That implies potential 12-month total return of about 168%.

Are you starting to see why I've taken such a large stake in Caleres?

I'm not alone in seeing the huge upside.

Yahoo Finance very conservative year-ahead target price for CAL is $36.67. That will likely prove too low a bar as it presumes just a 9.1-times multiple will be in play. That is a 34.5% discount to Caleres' typical P/E.

Value Line's analyst is also sanguine on CAL's future prospects. Its July of 2023 expected price range for CAL is wide, from $17 to $61. The midpoint over the coming 16-momths, though, is for $39, almost double the current quote.

Keep in mind that $39 is far from an upper limit. CAL changed hands north of $41 in 2018 on just $2.21 in EPS.

Many options players stand willing to pay generous premiums to buy out of the money calls and/or in the money puts on CAL out to Dec. 16, 2022.

Option sellers who are bullish on CAL can take advantage of that by shorting covered calls and/or naked puts.

With CAL south of $20, buyers were ponying up $1.10 for right to buy at $35 and $0.70 for CAL's Dec. 2022 $40 calls. Call writers would hardly complain if shares they bought at $19.65 need to be sold later for net prices of $36.10 or $40.70.

Conversely, traders who short naked puts on CAL should be willing to own the stock at net costs running from just $15.40 on the $20 strike to $18.10 on the much more aggressive, deep in the money $30 puts.

Buying options like those are high risk propositions. Selling them, puts the odds heavily in your favor do to the built-in margins of safety.

Caleres, at about 5-times earnings, appears insanely cheap.

My gut feeling suggests waiting for a rally before writing any covered calls. CAL traded near $29 on Nov. 18, 2021. It was $24.39 as recently as Jan. 24.

Buy some shares, sell some puts or consider doing both. I've been adding to CAL on its recent pullback.

At the time of publication, Price was long CAL shares, short CAL options.