UGGs Could Be Comfortable For Investors
Peter Lynch, the manager of the Fidelity Magellan fund when that fund was delivering some of its best returns, said in one of his books that investors should always notice where they shop and what they buy. If they like a product, chances are that others do as well.
This is, of course, just a starting point for investment ideas. But products you like could be made by great companies and some of those great companies could be great stocks. Based on recent news, that could be true for the company that makes popular shoes and boots that have held their popularity for many years.
Earnings Highlight the Stock’s Potential
Deckers Outdoor Corp. (NYSE: DECK) recently reported earnings for the most recent quarter and The Street reported,
“Shares of footwear and apparel giant Deckers Outdoor surged after the company released better than expected third quarter earnings.
Deckers Outdoor Corporation is engaged in designing, marketing and distributing footwear, apparel and accessories for both everyday casual lifestyle use and high performance activities. The company’s lineup of brands includes UGG, HOKA ONE ONE and Koolaburra.
Deckers reported non-diluted earnings per share of $6.59, up from $4.97 during the same period last year, beating the $5.31 per share of Zacks Consensus Estimate, which is based on analyst projections.
Third-quarter net sales rose 7.8%, hitting $873.8 million, up from $810.5 million during the same period last year. Operating income for the quarter came in at $244.7 million, up from $193.2 million last year,” Deckers said.
The company also raised estimates for its annual earnings report as well, with Deckers fiscal year ending on March 31.
Deckers now expects 2019 earnings to come in between $7.85 and $7.95 a share. That’s up from 2018’s $5.74 a share and considerably higher than the consensus number of $6.91 of analysts surveyed by Zacks.
“With third quarter results delivered and an updated outlook for the full fiscal year 2019, I am pleased to say that we are now well ahead of schedule to deliver on the long-term strategic goals we laid out two years ago,” said Dave Powers, Deckers’ president and chief executive officer, in a press release.
This news pushed the stock above an important resistance level.
A Trade for Short Term Bulls
As with the ownership of any stock, buying DECK 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 DECK
Every day, we scan the markets looking for trades that carry 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 DECK, the February 15 options allow a trader to gain exposure to the stock.
A February 15 $145 call option can be bought for about $2.40 and the February 15 $150 call could be sold for about $0.80. 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 DECK the maximum gain is $3.40 ($150 – $145 = $5; $5 – $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.