Trading Garmin for a Bounce

Reaction to Friday’s triple-whammy of earnings surprises in the financial (C), technology (GOOG) and industrial sectors (CAT) has put the market in a short-term overbought condition, making it likely that some consolidation will be needed early in the week before we can move higher, especially considering that the pop was supercharged by April options expiration. But there’s a good chance that higher we will indeed go. The Dow, S&P 500, Nasdaq 100, and Russell 2000 have all broken trading-range resistance (DJI and NDX most decisively), and strength is building in terms of price momentum, RSI, and market breadth.

With sentiment temporarily turning bullish and implied volatility the lowest it’s been year to date, a bullish net-debit trade might be in order. Nevertheless, any bullish positions should be considered short-term and speculative, for now - there’s no evidence yet that the longer-term bear market has ended. The ideal trade? An oversold stock that traders haven’t yet piled into; a conservative risk/reward ratio; ability to profit from a quick, short-term move; and potential for bigger gains if the rally continues.

One candidate for just such a trade is Garmin (GRMN). The once high-flying stock has hit new 52-week lows in each of the past two weeks, and while there’s little evidence of a long-term trend reversal - with the company facing recessionary consumer-spending cutbacks and declining gross margins, a 100% price increase like we saw last year doesn’t exactly seem probable - the stock last Friday did show signs of an incipient short-term bounce.

The Thesis

GRMN’s 14-day RSI broke up through 30 on Friday; the last two times this happened, it led to a rally amounting to at least $5. Price momentum, as measured by MACD, is starting to turn, and MFI seemingly headed for a cross above the oversold level of 20 suggests that there’s actual money behind the firming in price. The 20-day moving average overhead, at about $50, gives us plenty of room to make a quick buck, and if the stock finds support above that, the $55 area (50-day MA) would be the next target. Last, but not least, the 50-period moving average on the 30-minute chart gives us a clear backstop ($43.75) if the rally fizzles out.

The Risk

Garmin is scheduled to release earnings on April 30. Recent earnings announcements have beat estimates, but a bad miss could wipe out our entire position.

The Trade

Take a look at these three possible strategies:

   * Buy the May 50 call and sell the May 55 call. This trade has the potential for more than 200% profit if the stock is at $55 or above the week before expiration. But if the underlying doesn’t break $52.50 and stay above that level, time decay will eat away at the gains.

    * Buy the June 50 call and sell the May 55 call. This is a more conservative strategy, in the sense that the extra premium in the June call cushions the position on the down side, but it gives us more time to benefit from longer-term gains. If GRMN rises $5 in a week or two, we could expect as much as a 60% to 70% return; if the stock is above $55 the week before May expiration, our profit would amount to 150%, and we could roll the short call up and out to make room for additional potential profit. The down side is that the total cost is higher, so we would lose more if an earnings miss sends the stock into a tailspin.

    * If you’re a real cowboy, you could just buy the May 50 call and bet that GRMN will shoot up to $55 before time decay bites your butt.

Regardless of which one best suits your style, all of these trades look a lot better if entered after a pullback, on confirmation of support at $43.75 or above - but more aggressive, or just decidedly bullish, traders might want to jump in right away if price strength holds this morning.

In any case, let’s not forget for one second that all of these ideas are speculative in nature. If merely watching from the sidelines isn’t excitement enough for you, remember that risk management - i.e., keeping losses under control and not getting greedy with profits - can make all the difference between a nice, healthy 20% to 30% profit and a demoralizing 100% loss.

Comments

[daffy]

"Garmin is scheduled to release earnings on April 30. Recent earnings announcements have beat estimates, but a bad miss could wipe out our entire position."

Just a little fact checking here:

GRMN beat estimate for the last 14 of 15 quarters with an average "surprise" % of 17.5. The one miss was a $0.003 in 3Q06.

I wouldn't go and suggest GRMN is going to miss, which you didn't, but you did not do justice to GRMN track record for the last 4 years.

That being said, there was a press release about a revenue drop. That has to be factored in by now, as there have been many other price adjusters in the last month. So, if GRMN even comes close to the "street" then we should see a bounce. If you were watching GRMN at the last quartely report, you would see that a great report yielded a decent drop in share price. In today's market, I think that it is better to tell eveyone you are going to be broke in a month, and then beat, than to "meet the street". A true sign that the nellies are still in charge of this market.

With all of that being said, I am curious as to why anyone would head to the options market when S&P still has a strong buy and a 12 mo. target of $105?

[ROOSEVELT M.]

DAFFY, U R D BEST. PERIOD.

[Fausto]

I'm completely confused on GARMIN. I'm trusting the fundamentals of the company; market is overweighting a "bit" negative results

[SLINGER]

The one thing that needs to be pointed out is the following:

Many have focused on the projected 40-50% decrease in revenue from Q4 to Q1; however, everyone fails to take into account that Garmin is quite seasonal (with a spike in sales recognized during the Q4 holiday season).

If you take a look at the numbers behind it, a 40-50% from Q4 to Q1 yields a Q1 year over year increase in revenue between approximately 22-48%.

The company is the market leader of an industry that has room to grow. People are acting as if GPS/PND technology has stopped dead in its tracks and is a dying breed.

Get a clue - go long Garmin and reap the long-term benefits!

[hardrookwar]

Er, I don't know about that, Slinger. The analysts and stock-buying public seem to think that PND's are the buggy whips of the turn of the century--obsolete. Only cell phones have penetrated every corner of the market (including africa, india, chine) and if LBS becomes indispensible there, cell phones will be how most people get their info, not PNDs.

So long as there is a boat, plane, or car without a GPS, there is room for GRMN to grow. But otherwise, in a world of real-time info, GRMN is the next Dell--they make the device; NVT makes the OS; ATT is the ISP; GOOG is the gateway to POI's; and the www provides the site-specific content. GRMN will probably never be at 120 again. See Dell's long term chart (post bubble) to see what GRMN future looks like. I'm long on GRMN but I'm bailing at 59-60 next year.

[mmeister]

Here in Olathe, I watch Garmin expanding by leaps and bounds; new buildings all over the place and hiring like crazy. I may be wrong and am following their management over the cliff, but I still think they are a lot smart then the rest of us and know what they're doing. Their big screwup has been in investor relations which has been almost non-existent. They made a change at the top in that department last week. Hopefully that problem is solved.

[daffy]

hardrookwar ~

Do you think tha GRMN is doing a bit of data collection and reducng their reliance on any company that provides mapping data?

If I were at the top there, I would have a team of lawyers protect and making sure that any additonal data collection ensures proprietary significance and any existing contracts suggest that the changes to data tables inherently alters proprietary rights.

NVT would then be meaningless, and so would nokia. I get the feeling that nokia got a sour deal here.

I tend to believe that the people in charge at GRMN are a hell of a lot smarter than you are giving them credit for.

Now, as far as your speculation goes that Cell Phones are the only way people get their info . . . I am not so sure I agree with that. Cellphones are cell phones. Even though I would love to have one of those 1960's AT&T land line phones in my house, I am not going to go out and get one. Phones are a disposable item, and I doubt they will ever serve the same purpose as a PND. Now, in that thinking you have to realize that PND's will NEVER penetrate the market like cell phones will, UNLESS some genius can force the PND into a cell phone.

My guess . . .

GRMN will couple themselves with a cell phone manufacturer (sound familiar) and force the integration. After this technology hits the market, AAPL will come along and reinvent the cell-pnd union and tout it as the newest technology that exists and all the latte sipping, Onion believing Madisonites will help to make it the next new fad.

At that point we will see that PND's, cell phones, and personal data storage and utility devices will merge into one. I think Nokia is a little late to the market, and all GRMN has to do is to start building cell phones (instead of buying a cell phone company) and align themselves with a few international carriers and build a NEW WORLD NETWORK. How would evaluate GRMN then?

That being said, I am still going to sell when GRMN hits 70, unless the news changes and the madisonites start chanting in some binary mapping unison.

[baffled]

If GRMN beats estimates (likely to do by 10%), and maintains guidance with reasonable margin erosion to take market share away from their weak competition. Expect a similar jump such as we saw with GOOG last Friday (or higher).

Shorts have abused this stock pretty handily due to weak fundamental analysis (some included in this commentary) that has made many panic and give up their shares too cheap. Even in this slowing economy, GRMN's trailing and forward P/E assume negative to no growth which isn't the case for this company (check out what the Olathe poster shared).

Market is punishing strong companies with "guilt by association" tactics (in GRMN's case, T2 and SIRF). That tactic was being used on GOOG when everyone incorrectly identified a YHOO-MSFT merger as a challenge and overlooking their international expansion.

To add also, short interest ratio is very high (17M shares as of 4/15), well over 3. This is bullish. A squeeze could be in the making.

Also, recent comments by senior management on revenue confirmed previous Q4 07 guidance.

Finally the whole cell phone (the weak fundamental analysis I referred to) challenge, people can barely talk and drive at the same time. Can they be expected to drive safely while staring into a small screen for directions? Oh, and California's "hands free" cell phone law goes into existence 7/1/08. This new product is dead out going out the gates.

[daffy]

Quote from article:

"Garmin benefits from offering high-end devices for aviation and marine navigation — and from reporting in dollars. Also, it plans to meet the cell phone threat with its own combination phone and navigation device later this year, and it has announced a partnership integrating AOL's MapQuest into its devices."

Exactly what we are talking about here.

link:

news.yahoo.com/s/ap/20...;_ylt=AuaVVkeiq86OkGVO...

[daffy]

sorry, link didn't work, if you want to get the link, write to me on my website.

[hardrookwar]

Well, earnings announced today: up only 3% from Q1 2007. Sure sales are up, but if profit doesn't go up garmin is working harder and harder to make the same amount of money it made last year. This week's $600 government handouts to everyone might be used to buy a PND or two, but otherwise the housing market is in free-fall, consumer sentiment is as sour as it has ever been, and the economy has a long way to go before turning around. Q4 will provide the first news about the nuviphone, and Q1 next year will tell whether consumer confidence will turn with a new administration. It's going to be a long long time until then, and money in GRMN could probably be better invested elsewhere.