Surprising Triple-Digit Gainer’s Chart Signaling More Upside Ahead

With the economic situation in Europe, you’d think consumers would be spendthrifts. But one high-end clothing, footwear and accessories retailer appears to have captured the hearts and wallets of fashion-conscious Europeans.

Since going public in December, shares of luxury retailer, Michael Kors (NYSE: KORS) — named after the founder who is a judge on the popular TV show “Project Runway” — surged nearly 190%. And, as I explain below, the technicals point to more price appreciation ahead.

According to a market research report by Bain Capital, the global luxury goods market is expected to grow 6% to 7% in 2012, despite overall stagnant worldwide economic growth. This growth rate is projected to be maintained at least into the middle of the decade. As such, Michael Kors should continue to perform well, even with continued global economic troubles.

The technicals certainly paint a bullish picture.

From the $20 IPO price in December 2012, shares shot up to a high of $50.69 in just over three months. Encountering resistance at this level, shares sank to a low of $39.73 by late April and approached this low again in July.

As a result, a “V” shaped bottom formed, which was technically confirmed after the company reported upbeat first-quarter results in early August. Shares rocketed about $10 in one week, successfully breaking the $50 resistance level.#-ad_banner-#

This large gain, on higher-than-normal volume, created the flagpole of what appears to be a highly bullish pattern known as a flag formation.

The next part of the flag formation, the consolidation phase, which has taken the shape of a small rectangle, has formed over the ensuing weeks, as the stock has traded in a narrow range between current support near $51 and resistance near $57.

Typically, flag formations resolve bullishly. As such, if the stock can successfully break $57 resistance, it could move sharply higher, especially since there would be no historical resistance in sight.

The fundamentals support the bullish outlook. Over the past five years (taking into account pre-IPO numbers), sales have increased 44% annually. When the company reports second-quarter results on Nov. 13, analysts’ project sales will hit $500 million dollars. Same-store-sales in Europe are expected to increase a remarkable 50% from the year-ago period.

For the next quarter, ending in February 2013, analysts expect revenue to expand 39%, to $520 million, compared to $373 million in the comparable year-ago quarter. Due to an increase in European sales, analysts’ project full-year 2012 revenue will increase a whopping 54% to $2 billion, from $1.3 billion last year.

The earnings outlook is equally bright. Kors recently updated its second-quarter earnings guidance, increasing the outlook to the range of 38 cents to 40 cents per share, up from previous targets of 33 cents to 35 cents. Based on a pricing strategy that puts high-fashion products within reach of trend-conscious consumers (a women’s dress sells between $150 and $500), analysts expect third-quarter earnings to rise a whopping 85% to 37 cents per share. That’s up from 20 cents in the comparable year-ago period.

As the company increases its global store count and license partnerships across North America and Europe, analysts expect full-year 2012 earnings to rocket 82% to $1.42 per share, from 78 cents per share last year.

Based on its strong earnings potential, solid technical growth outlook and strong price performance, Investor’s Business Daily recently ranked Michael Kors third on the IBD 50 list of leadership stocks.

Given the strong technical and fundamental growth outlook, I plan to go long on the luxury retailer.

Risks to consider: High unemployment and a persistently weak global economy have so far not stopped fashion-conscious shoppers from buying the Kors label. However, if weak economic conditions prevail, or the brand falls out of favor, Kors could see a loss in customers. For the time being, however, the trendy label’s outlook looks highly positive.

Action to Take –> Buy Michael Kors at the market price. Set stop-loss at $44.30, slightly below past resistance. Set initial target at $64.98 for a potential 20% gain.

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Surprising Triple-Digit Gainer’s Chart Signaling More Upside Ahead