Ralph Lauren's Problems Are Reflected In Its Price

On Monday I bought Ralph Lauren (NYSE:RL).

Before getting into the numbers, I use a Valuation Model that creates a 'Valuation envelope' for each stock I follow. That 'envelope' is something akin to Bollinger Bands except its computation doesn't involve price movement but rather fundamental elements. It is anchored on the smoothed 10-year earnings growth of the company and the envelope's 'width' (its boundaries) is a function of the company's financial strength, its historic absolute and relative P/Es and the stock's beta.

The lower boundary of that 'envelope' (plus or minus 10%) is the Buy zone for the stock. The upper boundary (plus or minus 5%) is the Sell zone. When a stock enters that Sell zone, my discipline is to Sell Half of the stock position. That forces me to take money off the table and build my portfolio's cash position as a source of funds when stocks mean revert. But it maintains a position in the company as long as the fundamentals don't change.

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