Has Foot Locker's Selloff turned into a Bargain?

Key Points

• Foot Locker shares have had a poor year, but the low might be in.
• Their track record of falling hard is matched only by their track record of rallying equally hard. 
• With shares continuing to consolidate, we could be looking at the mother of all bargains right now.

When it comes to keeping investors on their toes and giving them sleepless nights, few stocks can match Foot Locker Inc NYSE: FL. The footwear and athletic apparel store has had its fair share of eye-watering rallies and drops over the years, and there are no signs of this abating, with the current selloff taking shares down 60% from February's high. 

Based on its trading history alone, it's not a stock for the risk-averse investor. Instead, it will be the dreamers and the adventurers who are tempted to get involved. And considering that Foot Locker shares are currently back trading at the same level they were at in 1986, 1994, 2007, and 2020, to name but a few years, you can be sure it's on their radar. 

The question in everyone's mind has got to be, at what point does this selloff turn into a bargain? 

Poor Fundamental Performance

Well, first things first. It's been a brutal year so far, all the more so considering that Foot Locker had managed to rally 100% from July of last year right through January. But a run of poor reports in the meantime, in addition to unfavorable macro conditions, have sent shares down below even their pandemic low from 2020. From a technical perspective, this will be a concern for both current investors and those of us on the sidelines trying to weigh up an entry point. 

Further complicating things is the deteriorating fundamental picture. The company's most recent earnings report delivered the devil's trifecta; they missed analyst estimates, lowered forward guidance, and suspended their quarterly dividend. That was only in August when the stock was already 45% from January. 

But all is not lost, and hope springs eternal. Shares hit their multi-year low in the immediate aftermath of that report, and the bears have been unable to take shares lower since then. In fact, there's an argument to be made that Foot Locker stock is on the verge of a comeback rally, and it could be time for the braver among us to dip a toe in. 

Shares are on track to log their second consecutive week of gains, which will be the first time this has happened since April. Foot Locker's Relative Strength Index (RSI), a widely used measure of how overbought or oversold a stock is, continues to rise rapidly from the low teens but still points to the stock being very much in the latter category. 

Tough Trading Conditions

Could it be that the market has way overestimated the worst-case scenario here? It's true that the macro environment remains challenging; we saw this with Nike Inc's NYSE: NKE earnings and even more recently in J.P. Morgan's State of the U.S. Consumer report. Among other troubling results, this report found that nearly 50% of consumers were prepared to cut down on apparel and footwear expenditure, with Foot Locker highlighted as one of those stocks most at risk. 

Echoing the gloomy outlook and Foot Locker's exposure to it, both Jefferies and Piper Sandler came out with fresh Neutral ratings on the stock last week. This is worth keeping in mind if you're thinking of picking up some stock on the cheap.

But They Feel Cheap

But this is exactly what might just make Foot Locker endearing right now. With a price-to-earnings (PE) ratio of just 12, the company doesn't have to deliver a whole lot to convince investors that things are turning around. Compared to, say, Nike, which has a PE ratio of 29, or Lululemon Athletica Inc NASDAQ: LULU, which has a PE of 47, Foot Locker is cheap down here. And with shares continuing to consolidate after August's trough, the risk/reward is actually quite attractive. 

Any entry around here can be easily protected with some tight stops below August's low of $15, while to the upside, there are a ton of gaps just waiting to be filled. Investors who do buy into the narrative that a bargain is opening up in Foot Locker will need an iron stomach, but the price history speaks for itself. This is a stock with a long track record of delivering triple-digit percentage rallies out of nowhere, having previously been almost knocked out. It's well used to getting back on its feet, and who's to say it's not about to do that again?