Margin Of Safety In Action

Clothing companies are not high on my list of potential dividend investment opportunities.  Markets are already fickle, adding in a fickle consumer base just makes things even more difficult.  Yet while that fickleness can blow up short-term traders come earnings seasons it also creates buying opportunities for more patient investors.

I opened a position in Guess? (GES) back in June at a price of $25.44.  Its yield was lower than my entry criteria so I offset that by pairing it up with a purchase of a higher yielding stock so that the average yield met my target.  The position was opened based on my estimating that the stock was trading with more than a 20% margin of safety to its fair value.

Now while I don't expect Guess to ever be a core holding in my portfolio along the lines of Coca-Cola or Johnson & Johnson I do plan to hold it for as long as it continues to pay an increasing dividend.  Even so major short-term movements, either up or down, should be paid attention to.  Major movements up could provide an opportunity to sell and invest the gains in a different (and undervalued) dividend stock while major movements down can indicate either a buying opportunity or a need to exit the position post haste.

When Guess missed earnings this week it resulted in a massive sell-off that left the stock closing more than 18% down at Friday's bell from where it opened on Monday.  Here is what that looked like in picture form:

The blue line is my entry price and the green dashed line is 25% above that level.  The area between the two is my margin of safety.  What does this mean? Even IF I was making a short-term play on Guess I would still be in positive territory after this week's events (I might have even taken some profits after getting a 20% return).

There it is folks: margin of safety in action.  Learn it, live it, love it.

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