This Cooler Maker Could Make Profits for Traders
For some investors, some companies are simply hard to think of as investments since they are defined by their products as low tech or common. Bloomberg recently reported on one example,
“While many investors were focused on the U.S. trade war with China and hopes for monetary stimulus, Yeti Holdings Inc. (NYSE: YETI) drew praise for new additions to its array of outdoor and recreational products.
Analysts at Robert W. Baird reiterated their outperform rating on the stock after Yeti announced a next-generation soft cooler, stackable coffee mug, lunch box and dog bed. The company also said it would introduce three new seasonal colors — river green, peak purple and clay — across its portfolio.”
“We are encouraged by the pace of product innovation at YETI, which serves to expand the brand’s addressable market opportunity,” Baird analyst Peter Benedict wrote in a note to clients.
Yeti rose [more than 50%] since going public in October last year. The stock has 10 buy ratings, two holds and no sells. The average analyst price target implies 30% upside from the current price.
Yeti Coolers LLC is days … opening its second retail location in the country.
The new store [opened earlier this month] in a historic district in downtown Charleston, South Carolina. Yeti opened its flagship retail location in Austin on South Congress Avenue in 2017 … and the company expects to open its third store in Chicago in the third quarter.
In a May 2 call with analysts, Yeti President and CEO Matt Reintjes said the company has also signed a lease for a fourth store, in the Denver suburb of Cherry Creek, with an expected opening in late 2019,
“As we have indicated, we remain thoughtful and balanced in selecting these locations, ensuring community and fit are right for the customer and our brand,” Reintjes said on the call.
Reintjes said in a statement that Charleston’s passion for the outdoors, fishing and the culinary world made it “an ideal city for our latest store,” calling South Carolina residents “wonderful supporters” of the brand.
The 5,349-square-foot Charleston location, located on historic King Street, will feature a bar that serves beer, wine, coffee and some food. The building was constructed in 1978 and was purchased by 360 King Street Partners LLC for about $11 million in 2017, according to Charleston County records.
Yeti anticipates hosting a variety of events, including concerts, film screenings, demonstrations and educational workshops at the Charleston location.
The share price started off slow but received a jolt early in 2019 after the release of positive 2018 fourth-quarter revenue figures. Net sales jumped from $202.1 million in the fourth quarter of 2017 to $241.2 million in the same period in 2018, a 19 percent bump.
Yeti said in its fourth-quarter report it spent about $795,000 in fiscal 2018 on “investments in new retail locations and international market expansion” and expects that figure to grow to about $1 million in fiscal 2019.
Before the company released 2019 first-quarter financial results, its stock had reached a high of $35.68 when the markets closed April 30. Yeti saw net sales increase by 15 percent year-over-year in Q1.
The company also reported a 28 percent year-over-year increase in direct-to-consumer sales, registering net sales of $61.7 million, compared to $48.3 million in the first quarter of 2018
A Trade for Short Term Bulls
As with the ownership of any stock, buying YETI 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 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 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 YETI
Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For YETI, the August 16 options allow a trader to gain exposure to the stock.
An August 16 $35 call option can be bought for about $1 and the August 16 $37.50 call could be sold for about $0.54. This trade would cost $0.46 to open, or $46 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 $46.
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 YETI the maximum gain is $2.04 ($37.50 – $35 = $2.50; $2.50 – $0.46 = $2.04). This represents $204 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $46 to open this trade.
That is a potential gain of about 343% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.