True Religion Short Squeeze

I thought I would try something new today. Let's call this speculation.

True Religion (TRLG) is a (yes - that's right - a retailer!) high end branded apparel maker. Their primary market is in the US.

There are a few points that make this an interesting speculative trade. First of all, there is the short interest. As of May 27, short sale interest was at a whopping 57.4%.

That's a huge short interest, that could be the fuel for a short squeeze fire.

But are the shorts right?

Full year '09 estimates are for $1.89, with a growth rate of 20%. Applying a PE of 20 to '09 numbers values the company at $37.8 (currently at $27).

Can the growth rate really be 20%? I think it might. This isn't just your plain retailer. It's a high end fashion item. It's more about brand. Form over function. (Or so I've been told. I don't quite get it myself.) And so far, this company has been able to deliver and boosted guidance.

True Religion boosts 2008 guidance; shares climb

The company also boosted its 2008 sales prediction to a range of $220 million to $225 million, from its previous estimate of $210 million to $215 million.

So, now on to the trade.

With what could have been a short term bottom in the market, we may see a rally in the retailers, which should flow money back into this sector. Short sellers had probably expected this chart to break down, but it hasn't, with its lofty valuation. So there's the possibility they may cover, simply to re-short when the market is again overbought. But at a 57% short interest, covering could prove to be rather difficult.

Hence, a True Religion short squeeze.

One way to play this could be with the Jul or Aug options at a strike of 25.

No Disclosures.

Comments

[stockmannick]

Short interest is actually 74% u need to update your findings

[borisb]

the shares have moved up for 2 months, 18s > 27s reflecting occuring covering action. where have you been?

[Chris Versace]

I hear you on the short squeeze - and sure you mention the company's guidance but let's look around lately and we have seen a rash of companies reduce their outlook for the year. To base your argument on "what they said" ....well let's just say let's try some analysis. Case in point, the EPS growth expectations by the Street is 61% in the September quarter over the June quarter - very aggressive given the current environment. I say that having visited a number of True Religion places - their own stores as well as where others have sell the products(s). The overwhelming feedback was - "its been dead." And I get the point that the product is well liked but with people cutting back vacations as gas prices climb, grocery companies indicating that people are trading down, you have to think its possible that while people may want True Religion jeans (or some other fab fav kind) that they may settle at least in the near term for something else. And that does not even get into the notion that this is a "dresses" year for women - not an expert there but I have been told by more than a few women that this is the case.

[stockmannick]

Chris, what stores have u been hearing "its been dead"?

I live right near the Chicago store and they said business has never been better. You do realize they raised full yr guidance at last conference call and said bookings were up 40% over 2nd quarter of last yr.

Given that short interest is over 70%, shorts have no more bullets left. Only way stock goes down is if longs sell their positions, and why should they given the only way shorts can cover is by buying the stock back.

[risk manager jeff]

This is a total spec for me. I'm more a macro based investor. But I think this is an interesting idea for a small position. Actually, I hope to make just enuff to buy a couple pairs of their overpriced pants. I agree, that in order for the stock to fall, the longs would have to sell. It won't get pushed anymore by shorts. Do I know how the business is doing? I don't. In this case, I'm going to "trust" what management is saying. I can see this as an easy short when you consider the low international exposure and high focus on US consumers. But I compared this to LULU, which seems even more expensive, even though, it's down alot from the hyped days of the fall.