The distinctions between growth and value styles are largely irrelevant. To achieve long-term returns for shareholders, you need both. Growth without value – i.e. generating positive economic earnings – does nothing for investors. Conversely, value without growth offers limited upside.

Investors should be excited about a new addition to our Most Attractive Stocks list: Skechers (SKX: $29/share). This stock offers a unique combination of growth potential, strong profitability, and a valuation with low market expectations. Investors have overreacted to one bad quarter, and many still seem skeptical of management after the “Shape-Ups” debacle in 2010/2011.

However, a deep dive into the numbers shows that Skechers has meaningfully improved its business operations. The stock has dropped over 50% in the past eight months, and even if the firm’s growth slows dramatically and margins shrink, the stock’s cheap valuation makes it a safe stock with high potential upside.

Rebuilding Investor Confidence

Many in the market simply don’t trust Skechers’ management after some debacles in the recent past. Most notably, the company made a big bet on its Shape-Ups fitness shoes a few years ago, going so far as to air a Super Bowl ad featuring Kim Kardashian in 2011 to promote the shoes.

This investment quickly went south for the company as its medical claims surrounding the shoes were proven to be false, and it had to settle for $40 million with the FTC. Consumers quickly fell out of love with the clunky-looking footwear, inventories piled up, and Skechers ended up selling millions at a discount.

Fortunately for investors, the company appears to be learning from its mistakes, diversifying its brands and executing a broad-based growth strategy that doesn’t rely on any one fad or channel to drive increases in sales.

Increasing Diversification

Not only has Skechers diversified its offerings, it has also done an excellent job in recent years of diversifying its suppliers and customers. Figure 1 shows that Skechers has decreased the share of inventory and sales coming from its top five suppliers and customers. This reduced concentration increases the company’s leverage and gives it more pricing power, manifesting in its growing operating profit (NOPAT) margins.

Figure 1: Lower Share For Top Five Suppliers And Customers Increases Pricing Power

Sources: New Constructs, LLC and company filings.

The share of Skechers’ goods coming from its five largest suppliers decreased from a peak of 70.6% in 2010 to 56.5% in 2015. The share of its sales coming from its five largest customers fell from a peak of 25.1% in 2009 to 14.6% in 2015.

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