Rick LaMartina sends: Over the last year, the U.S. equity markets have been volatile, to say the least. This great wave of negativity has caught the general public by surprise. Markets have been under assault from the credit crunch, high energy prices, and a slew of other fiscal maladies. As such, the Dow Jones Industrial index has shed nearly nine-percent (-8.8%) over the last 6 months, while the S&P index fared even worse by losing over ten-percent (-10.6%) of its value in the same period. Granted, such a correction is not out of the ordinary by any historical measure. With GDP growth hovering around zero in real terms, a little steam out of the kettle was prudent and necessary. Some sectors, however, have been absolutely clobbered during the recent market attenuation, which has created some interesting opportunities for long-term investors.

The apparel/accessories industry, which lies under the framework of the consumer-cyclical sector, has been punished by Wall Street. A great number of stocks are hovering near their 52-week lows. Some present opportunities for the bold. Others are merely traps for the foolish. It is our job as investors to decipher which companies have the fortitude to persevere a contraction in consumer spending and those that will succumb to the current unfavorable retail conditions. What we know right now is that the consumer is being pinched on many fronts. Food and energy prices are up across the board. Gold and other commodities are skyrocketing as investors try and stave off the effects of inflation. Home prices are undoubtedly falling throughout the country. So it’s fairly reasonable that industries sensitive to consumer discretionary spending are taking some big hits. In my estimation, however, there are some firms in niche retail markets that are more resistant to a market downturn and are being unfairly lumped in the mean.

For instance, Coach (COH) fits into that such category. It is a designer and marketer of handbags and accessories, and has a pristine balance sheet along with a solid, conservative management team lead by CEO Lew Frankfort. According to the company’s 2007 Annual Report, Coach generated $779.1 million in net cash from operating activities, which along with almost $900 million in cash on the balance sheet helped fund a new stock repurchase program of up to $1 billion through June 2009. Thus the inner crust of Coach believes that the company is undervalued at current market prices and has plenty of growth potential in the coming years. Additionally, it shows management’s dedication to increasing shareholder value by reducing outstanding shares and strengthening EPS. The valuation metrics of COH are at five year lows. It’s price/earnings multiple is 15.9x, which is only 2/3rds its historical average of 25x. By doing some basic arithmetic, one can project a fair value price-per-share in 2008 and 2009 by using a modest P/E multiple of 20x EPS estimates in ‘08 and ‘09 (20 x $2.04= $40.80/share in ‘08 & 20 x $2.34= $46.80/share in ‘09. Considering COH closed out the month of February at $30.32, my fair value price of $40.80/share in ‘08 represents over a 35% increase.

On top of a solid balance sheet that has virtually no debt and plenty of cash on hand, Coach has been solidifying its image domestically as well as internationally. Its products are well-made, well-regarded, and broadly appealing. Adolescent females all the way up to retired grandmothers swear by their products, which highlights the diversity of their business model across all types of demographics. On January 23rd, 2008, CEO Frankfort addresses this strength of Coach’s business in the 2nd quarter earnings report, “Our strong overall performance reflects the critical balance provided by our diversified business model, which limits our dependence on any one channel. This enabled us to achieve our sales and earnings goals despite a tough retail environment in the U.S.” Furthermore, Coach looks to tap into high growth potential markets such as Russia, for which it is opening at least 15 locations over a 5 year time frame. This recent announcement, coupled with expanding the number of stores in other emerging markets such as the Middle East and China, gives Coach a growing international footprint to complement its domestic presence.

So as the sage of Omaha likes to put it, “Be greedy when others are fearful.” Of course the market has plenty of issues to figure out, but markets tend to work things out in the long run. Just keep your logic moving forward and don’t let fear paralyze your ability to recognize and exploit inefficiencies in the system. All companies are not created equal. Capitalize on broad-based sell-offs by picking up the gems out there.

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Disclosure: Author is long COH.