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Summary Management needs to act to regain investor confidence and improve the stock’s performance. Shares were hammered with a massive 24% drop on recent earnings release. Stock valuation is difficult to rationalize even when comparing to struggling luxury retailer Coach. Introduction It’s been about a month since I decided to start covering a new portfolio here on Seeking Alpha that uses cash secured put options to invest in the market. This article provides an update on portfolio performance along with some thoughts and analysis on one particular holding that has proved to be a frustratingly poor stock of late, Michael Kors (NYSE: KORS ). The portfolio concentrates on companies that exhibit strong cash flow and reasonable valuations. I don’t necessarily need a stock’s price to increase dramatically to make money, I just need it to not drop dramatically in price to make money. Portfolio Performance Overall portfolio performance is on pace for a potential 16.74% annualized return (returns calculated based on current moneyness of options) and a total of $8,556.08 in option premium has been received with a total capital requirement of $81,650. Current portfolio positions are outlined in the following tables. Cash Secured Puts STOCK CURRENT PRICE PUT SELL DATE PUT EXPIRY PUT STRIKE PREMIUM RECEIVED PREMIUM % OF STRIKE CURRENT ANNUALIZED RETURN DAYS TO EXPIRY REQUIRED CAPITAL AAPL 12660 01/29/15 10/16/15 $125.00 $1,088.00 8.70% 12.99% 119 $12,500.00 EMC 2707 02/06/15 07/17/15 $27.00 $152.00 5.63% 13.61% 28 $5,400.00 2 POSITIONS KORS 4660 01/29/15 08/21/15 $72.50 $714.00 9.85% -37.08% 63 $7,250.00 LVS 5306 01/29/15 09/18/15 $55.00 $589.00 10.71% 11.96% 91 $5,500.00 QCOM 6688 03/10/15 10/16/15 $72.50 $496.00 6.84% -1.50% 119 $7,250.00 DFS 5875 05/11/15 10/16/15 $60.00 $337.34 5.62% 8.52% 119 $6,000.00 WDR 4931 05/01/15 09/18/15 $50.00 $344.00 6.88% 15.42% 91 $5,000.00 IVZ 3890 05/20/15 10/16/15 $41.00 $214.34 5.23% 0.26% 119 $4,100.00 UAL 5325 05/21/15 09/18/15 $55.00 $484.34 8.81% 18.65% 91 $5,500.00 F 1511 05/23/15 12/18/15 $16.00 $150.65 9.42% 6.96% 182 $4,800.00 3 POSITIONS GLW 2094 05/01/15 11/20/15 $21.00 $160.00 7.62% 14.09% 154 $4,200.00 2 POSITIONS MO 4932 06/10/15 09/18/15 $49.00 $220.34 4.50% 17.83% 91 $4,900.00 Put Spreads STOCK CURRENT PRICE PUT SELL DATE SHORT PUT STRIKE LONG PUT STRIKE PUT EXPIRY SHORT PUT PREMIUM LONG PUT PREMIUM PAID CURRENT ANNUALIZED RETURN DAYS TO EXPIRY REQUIRED CAPITAL QCOM 6688 01/29/15 $62.50 $50.00 07/17/15 $424.35 $27.63 98.34% -42112 $1,250.00 FB 8251 01/29/15 $75.00 $45.00 10/16/15 $689.34 $22.68 36.59% -42099 $3,000.00 AAPL 12660 01/29/15 $115.00 $75.00 10/16/15 $1,039.33 $43.63 41.81% -42059 $4,000.00 GILD 11980 02/18/15 $105.00 $95.00 08/21/15 $979.34 $46.64 533.14% -42069 $1,000.00 The Gilead position was converted to a put spread given strong momentum in share price. Added positions include cash secured puts sold on shares of Ford, Invesco, Discover Financial, United Continental, and Altria. More information regarding Discover and Altria can be found here and here . Michael Kors My position in Michael Kors has been a disaster so far and my worst performing stock by a mile. The company was punished severely during the last earnings release. Comparable same store sales went negative in the US market and that was not well received…at all. Shares were hammered with a massive 24% drop. While certainly disappointing, I thought the reaction was a little overdone. I knew that poor results could lead to a large drop in share price but never imagined a 24% move. It’s practically a given now that I’ll be put shares of KORS come August, which I am fine with for now. My current thoughts on KORS are that management needs to do something significant to regain investor confidence and improve the stock’s performance. Failure to show a concerted effort regarding these issues will only further support the growing belief among investors that KORS is a value trap. The company’s management already has a black eye from the head scratching deal struck with Michael Kors Far East Holdings (MKFEH) that gave away the retail market in China through 2041. That was a very bad deal for investors…well, except for the two former Michael Kors board members and a couple of others who own the Far East Holdings company. Despite all of the negativity surrounding Michael Kors right now, I am willing to take and wait and see approach and give management a chance to redeem themselves and the stock. The company isn’t losing money or on the verge of bankruptcy. Quite the contrary, it continues to deliver solid top and bottom line double digit growth. While the 24% drop on earnings was terrible, it also took a lot of risk out of the stock in my opinion and the valuation is difficult to rationalize, especially when compared with Coach (NYSE: COH ). The Coach Argument Many have made the argument that Michael Kors will go the way of Coach and that may very well be the case. However, evaluating the multiples applied to both companies suggests the market believes Michael Kors’ future prospects are much dimmer than Coach. Coach currently trades at a forward P/E multiple of 19.14 and PEG ratio of 2.30. That’s for a company with a five year EPS growth forecast of 8.33%. Michael Kors, on the other hand, has a five year growth forecast of 19.89% and trades at a forward P/E of 14.12 and PEG ratio of 0.71. How can the market’s view of Kors’ future potential be any more bleak right now? Coach’s suffering has been accompanied by a loss in perception of its status as a “luxury” retailer through discounting and also by a shift in consumer preferences, which can change as quickly as the wind changes direction. Even if Michael Kors is to suffer the same fate, I would gladly have Coach’s valuation applied to Kors which would currently make it an $80+ stock based on 2016 EPS estimates. Summary Despite the poor performance of Michael Kors, the portfolio is performing well overall. I will be looking to open additional positions once the current Greek debt situation becomes a little more clear. Also, I will be keeping a very close eye on the bond market as the Fed comes ever closer to increasing rates. I would expect to see long term rates begin to rise as an expected Fed rate hike nears, otherwise a flattening yield curve poses a major risk. As evidenced by the last two market crashes, flattening and inverted yield curves served as a warning of danger ahead. Disclosure: I am/we are long KORS. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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