This Watch-Maker Could Deliver a +34% Return

Fashion stocks can be notoriously tricky to trade, but shares of this stylish watch, jewelry and apparel maker appear to offer a solid profit-making opportunity.

Driven by strong fundamentals, this stock is already up nearly 73% year-to-date. Just this past April 2nd trading week, shares hit an all-time high, while bullishly emerging from a rounded bottom basing pattern. With no overhead resistance is in sight, the stock looks poised to move higher.
 
On April 3rd, Fossil (Nasdaq: FOSL) became part of the S&P 500 Index ($SPX). The watch retailer replaced Medco Health Solutions, which was acquired by Express Scripts (Nasdaq: ESRX). Its placement in the S&P gives Fossil increased prominence, but what’s really driving the stock is its aggressive international marketing. 
 
The company has made large capital investments in developing areas and is now reaping the rewards. It is experiencing strong demand in regions like Asia and Europe, where fourth-quarter net sales increased nearly 19% and 16%, respectively.#-ad_banner-#
 
Further propelling international growth is the recently completed acquisition of competitor Skagen designs. Skagen, a Nevada-based watch, jewelry, sunglasses and clock maker was acquired for $231.7 million. The company was attractive to Fossil because of its well-established presence in Europe, the Middle East and Eastern Asia. The purchase should help Fossil further leverage the European and Asia markets.
 
Fossil owns more than 390 stores worldwide. Over the 2012 year, the company plans to open 70 to 75 new stores in both the U.S. and internationally. As Fossil continues to expand across the globe, its growing brand presence should continue to drive profit growth. 
 
Traders certainly seem convinced.
 
As the two-year chart below shows, Fossil was on a strong uptrend from June 2010 through July 2011. Over that time, the stock rose over $100, from a low of $33.86 to a high of $134.98.
 
 
Peaking at this level, shares proceed to fall dramatically. In four short weeks, the stock lost nearly half its value, sinking to a low of $69.57 before finding support. The Major uptrend line was broken in the process.
 
Knocking against support, the stock struggled to regain ground, rising to a high of $110.74, only to fall back, touching a low of $76.72 in late December 2011.
 
During this trading activity, a rounded bottom basing pattern formed. Note the gradually decreasing volume trend during the fall and early winter of 2011 and the dramatic increase of volume in February when the shares broke $110 resistance in January 2012. 
 
Since that time the shares has formed an Intermediate-term uptrend line and Fossil has been on a tear. 
 
This holiday-shortened April 2nd trading week, the stock went through resistance, hitting a new all-time high near $138. With no historical resistance in sight, shares could move much higher.
 
The strong technical outlook is supported by solid fundamentals.
 
In mid-February, the watch-maker reported upbeat fourth-quarter and full-year results.
 
Driven by double-digit sales growth across all major brands, products, and geographies, fourth-quarter revenue increased 18.5% to $830.8 million, from $701.1 million in the year-ago period.
 
Due to increased sales of watches and leather goods, full year 2011 revenue increased 26.4% to $2.6 billion, from $2 billion a year earlier.
 
For the full 2012 year, analysts project revenue will increase 16.5% to $3 billion and gain a further 15.2%, to $3.5 billion, by 2013.
 
The earnings picture is similar.
 
Driven by strong product demand, fourth-quarter earnings surged 28% to $1.87 per share, from $1.46 in the comparable year-ago period.
 
Due to success with its lifestyle and multi-brand watch business segments, full-year 2011 earnings were up 16% to $4.61 per share, from $3.77 per share a year earlier. A favorable currency exchange, combined with a lower outstanding share count, created by an ongoing stock repurchase program, also helped fuel the gain.
 
For the full 2012 year, the company expects earnings will be in a range of $5.40 to $5.50 per share, representing at least a 17% increase from $4.61 last year. By full-year 2013, analysts expect earnings to increase an additional 22% to $6.68.
 
Given the strong fundamental outlook, supported by bullish technicals, I plan to go long on the watch maker.
 
Risks to consider: Fossil is currently at an all-time high and could peter out from here. Although the high-end retailer is currently doing well in a tough retail environment, watches, jewelry and accessories are discretionary items. Cost-conscious consumers could move on to the next hot brand. As such, I will enter the position with caution. I will place a buy-on-stop order just above psychological resistance of $140, at $141.74. This means if the stock does not hit or go above $141.74, I will not enter the position.
 
With no historical resistance in sight, my target is $189.39, well under round-number resistance at $200. My stop-loss is $109.89, just under $110 support. The risk to reward ratio is approximately 1.40:1.