A Warm Jacket Could Be a Good Investment
As winter approaches, many individuals who live in colder climates are thinking about whether or not to invest in a warm jacket. There was a time when a jacket didn’t require an investment. But, the Chicago Tribune notes that warmth and style now come at a price:
“Canada Goose started to be heavily adopted by Hollywood film crews on location. It was featured in “The Day After Tomorrow” and “National Treasure.” The company even has a parka named Mystique, after Rebecca Romijn’s icy-blue character in the “X-Men” movies — the actress asked the company to develop a coat that could keep her warm on set.
Model Kate Upton modeled one of the company’s bomber jackets on the cover of the Sports Illustrated Swimsuit Issue in 2013. The company sponsors film fests, and its jackets were featured in the James Bond film “Spectre” and warmed crew members of “Game of Thrones.”
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So from there, it wasn’t long until the trendy set latched on to them.
I asked Canada Goose CEO Dani Reiss about the phenomenon, but he bristles that Canada Goose is trendy. “We are a function-first brand, not a fashion brand. We are built on function — of course we want people to look good in our products … but that’s not the first consideration.”
“Consumers come to us because we are a real brand with real products that have an inherent and authentic story; our heritage, craftsmanship and product quality resonate. They know that we’ll protect them from the cold, especially those serious winds and winters in Chicago,” says Reiss.
On the Canada Goose website, you can’t touch a men’s jacket — a lightweight down one at that — for less than $400. The top-of-the line Canada Coat tops out at more than $1,600.”
And, don’t expect a sale…
“I asked a salesperson at the Chicago location if I could expect a discount when the shopping frenzy was over. “No, because we don’t do discounts. We’re like Louis Vuitton,” he quipped.”
All this has contributed to a long term up trend in the stock.
Analysts Push the Stock Out of Its Range
For most of this year, the stock traded in a range but that changed after an upgrade. Bloomberg reported,
“D.A. Davidson initiated coverage with a buy rating. The stock has more than doubled this year and more than two thirds of the analysts covering the company recommend buying shares.
The newest of the bulls, D.A. Davidson’s John Morris, said in a note to clients that Canada Goose could reach more than $1.5 billion in revenue in five years as it increases its global footprint across the U.S., Europe and Asia. That’s up from the roughly $588 million in sales that analysts expect to see for the fiscal year ending in March, according to data compiled by Bloomberg.
“The company will begin pulling multiple levers to accelerate results over the next couple of years,” Morris said in a note to clients. He sees Canada Goose “becoming a more 3-season company through expansion into lighter-weight jackets, sweaters, base layers, and accessories.””
The price move is shown below.
A Trade for Short Term Bulls
As with the ownership of any stock, buying GOOS can require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor can purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor can use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy can be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for GOOS
For GOOS, the October 19 options allow a trader to gain exposure to the stock.
An October 19 $65 call option can be bought for about $2.15 and the October 19 $70 call could be sold for about $0.75. This trade would cost $1.40 to open, or $140 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $140.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in GOOS the maximum gain is $3.60 ($70 – $65 = $5.00; $5.00 – $1.40 = $3.60). This represents $360 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $140 to open this trade.
That is a potential gain of about 257% based on the amount risked in the trade. The trade in GOOS could be closed early if the maximum gain is realized before the options expire.
For this trade in GOOS, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.