Follow the Money
“Follow the money” is a catchphrase popularized by the 1976 movie All The President’s Men, which suggests a money trail can help uncover a corruption scheme. That might be true and many investigative reporters have undoubtedly spent time following the money over the years.
But, this is also an important idea for investors to consider. Insiders are the smart money in a company and the regulations make it relatively easy to follow the follow the money. Insiders must report their buying and selling activities.
In general, a cluster of buying can be a useful indicator. It demonstrates that insiders are putting their own money into the company. This was the case of the insider buying summarized in the chart below.
This is the insider summary for Camping World Holdings, Inc. (NYSE: CWH). Marcus Lemonis is the CEO of the company and may also be familiar to you as the star of the CNBC show The Profit.
When looking at insider activity, transactions are no cost stock grants and should be ignored. Ignoring those, we see that Lemonis was selling at $35 a share but he and other insiders were buying in the low $20s. There seems to be agreement among insiders that the stock offers value at that level.
Lemonis Explains the Value
The stock has had its ups and downs since going public in 2016.
Lemonis recently admitted on CNBC that he’s “made some rookie mistakes” as the CEO of a public company.
“There’s a big transition from being private and I would say that I’ve really learned,” he told “Mad Money” host Jim Cramer in an interview, adding that “the biggest learning curve” was how to communicate his corporate strategy to the public market.
One recent misunderstanding revolved around Camping World’s recent acquisition of Gander Mountain, a hunting, fishing and camping equipment retailer.
“I think what happened was people originally thought that we bought Gander Mountain to get into the big-box retail business,” Lemonis said. “[That’s] false.”
“We disclosed today at the Baird Conference, in a public environment, our real strategy behind the acquisition of Gander,” Lemonis continued. “It was our backdoor entry into the market in Minnesota, Wisconsin, Indiana, Illinois, Pennsylvania and Texas, where we’re going to be putting RVs in most of those locations.”
Lemonis explained that while Camping World sells outdoor accessories, its primary business is in recreational vehicles, or RVs.
“We have 130 RV dealerships today. At the end of 2019, we’ll have 165, 160 to 165. That’s 20 percent growth,” Lemonis told Cramer.
Camping World’s business also has a technological twist: the majority of its business comes from an online database called the Good Sam Club. On Wednesday, Lemonis argued that Good Sam Club made his company “the category-killer.”
“That’s really how we make our money,” he said. “We acquire new customers and we find new people through the sale of RVs and the other products. And I think that’s different than people thought it was.”
Now, the stock market seems to be buying into that vision and CWH has been rallying off its lows.
A Trade for Short Term Bulls
As with the ownership of any stock, buying CWH could 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 could 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 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 could 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 could 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 CWH
For CWH, the July 20 options allow a trader to gain exposure to the stock.
A July 20 $25 call option can be bought for about $2.10 and the July 20 $30 call could be sold for about $0.50. This trade would cost $1.60 to open, or $160 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 $160.
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 CWH the maximum gain is $3.40 ($30 – $25 = $5.00; $5.00 – $1.60 = $3.40). This represents $340 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $160 to open this trade.
That is a potential gain of about 112% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, 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.