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Considerations For Hedged Sketchers Shareholders

Sketchers, which was included in a hedged portfolio we presented here in late August, is now down 31% since then, after Friday's post-earnings crash.

Although Sketchers was hedged against a >15% decline in our hedged portfolio, Sketchers shareholders hedged in that manner were only down 7.6% by Friday's close..

We discuss possible courses of action for hedged Sketchers shareholders now, informed by data from backtests of similar situations.

Sketchers Shares Scorched After Q3 Miss

Shares of Sketchers (NYSE:SKX) tanked 31.5% on Friday, in the wake of the release of the company's quarterly numbers after the close on Thursday. Although its adjusted earnings per share beat analysts' estimates by 3 cents, Sketchers' 27% revenue gain was below analysts' expectations, as was its growth in its domestic retail sales.

One of Our Top Picks in Late August

In late August, Sketchers had one of the highest potential returns among optionable U.S. securities, as calcuated by Portfolio Armor's security selection method. In an article published then ("Dead-Cat Bounce or Continued Bull Market? How To Invest If You're Unsure"), we presented the hedged portfolio below, which was designed for an investor with $100,000 to invest who was unwilling to risk a drawdown of more than 15%. Sketchers was one of a handful of stocks included, along with fellow shoe company Footlocker (NYSE:FL) (which dropped more than 8% on Friday), Hologic (NASDAQ:HOLX), and Netflix (NASDAQ:NFLX):

As with all security selection techniques, ours is often wrong, so, in the hedged portfolio method, we insure against being wrong by hedging every position. You can see the SKX hedge (an optimal collar) in the screen capture of the hedged portfolio above, but below is...