In the past year, Canada Goose Holdings (TSX:GOOS)(NYSE:GOOS) has seen its stock soar, rising around 50% and reaching highs of more than $95. Lately, however, the stock has started to tumble, losing around 18% since mid-February when the company released its latest quarterly results. Despite having a good quarter, the stock failed to generate any bullishness.
Why is the stock struggling?
Besides the company’s earnings back in February, there haven’t been any big developments relating to Canada Goose that would suggest this recent sell-off is tied to any events surrounding the company. Instead, I suspect it could simply be investors either cashing in the gains they had achieved up until that point, or they’ve simply adjusted their portfolios to invest in stocks that have less risk. Let’s take a look at both scenarios to see what may have happened.
Given how well Canada Goose had done on earnings day and its ability to perform above expectations, many investors may have been looking to sell on earnings day in anticipation of another strong quarter. However, when that didn’t happen, it led to a complete sell-off instead.
In the days leading up to the company’s earnings, you could see a significant rise in price, with the stock climbing to around $79 just before the quarterly results were set to be released for an increase of over 20% in just a few weeks’ time. This is why I suspect speculators may have been making bets that the stock would again soar to highs of around $100 a share and were ready to sell on earnings day regardless of what happened. And because of how much buying had been happening leading up until earnings, it simply resulted in an excess of selling activity and drove the price down.
This is the danger in trying to look for patterns in stock prices. Investors try to convince themselves that prior events will repeat again and, when they don’t, they are in for a nasty surprise. That’s why sticking to fundamental analysis is always a safer option for investors and that’s also why it’s possible Canada Goose has been losing steam lately: its price is simply too high. With the stock trading at more than 50 times its earnings and around 20 times book value, investors are paying a big premium to own the stock.
And while the company has done a great job of producing significant growth, whether it’s worth such high multiples is another story. As concerns about a recession weigh on investors, it’s entirely plausible that many have rebalanced their portfolios away from high-priced stocks.
It’s not always clear why a stock has declined in price, especially when there is no clear event tied to it. With volatile stocks like Canada Goose, there are many factors that could have impacted it; it could have been as simple as one large investor selling shares that triggered lots of stop losses and subsequent selling by speculators.
However, even with the decline in price, Canada Goose is still a bit of a pricey stock for me to buy it today. I’d suggest investors wait for more of a drop in price before picking it up.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor David Jagielski has no position in any of the stocks mentioned.