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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Coach To Buy Weitzman: No Big Deal

    Shares of Coach (NYSE:COH) have traded up a bit as the market digests the rumor and now the fact of their acquisition of Stuart Weitzman.

    I apply two simple tests: 1) was the Price/Sales comparable to the acquirer's? and 2) is the acquired firm less than 25% of the acquirer?

    Weitzman has about $300 million per year in revenue, compared to Coach at $4.8 billion. So the size is fine, a bolt-on at 6%. The purchase price is $540 million, for a Price/Sales ratio of 1.8, compared to Coach at 2.2. Very possibly Coach can add value to the acquired franchise.

    The strategic fit is good. Coach envisions itself as a "leading design house of modern luxury accessories and lifestyle collections with a rich heritage of pairing exceptional leathers and materials with innovative design." Luxury shoes fit into this strategic goal nicely.

    Given the small size, there is little reason why this should move the needle. The upcoming earnings report, which will include the seasonally largest quarter, will provide insight into the success of the turnaround effort, to include Stuart Vever's new designs.

    Tags: COH
    Jan 06 9:16 AM | Link | Comment!
  • Playing Coach For A Volatility Squeeze

    While waiting patiently for Coach (NYSE:COH) management to execute on their turnaround plan, I notice that the stock has stabilized and looks like a set-up for a volatility squeeze after 2Q FY 2015 earnings are reported. Here's a chart, with Bollinger Bands on a 13 week interval.

    (click to enlarge)

    Please note that the bands have closed in for the past quarter. This pattern usually ends in an increase of volatility, a widening of the gap between the bands, and a relatively rapid move. In this case, it's about guessing the direction.

    Earnings for the quarter ending 12/31 are expected the week of 1/20/2015. The previous quarter was an upward surprise, which appears to have stabilized the downward slide. Shares are edging up a bit since the last report, shown by the "E" on the chart.

    I'm guessing that a beat is more likely than a miss. I also think low expectations will limit the downside on a miss, and accentuate the upside on a beat. So risk/reward is good, by that line of thinking.

    Options Strategy

    I like a version of the bullish reversal here. Monday I plan to sell COH May 2015 35 puts, and use the proceeds to buy 3 times the number of COH May 2015 38/41 vertical call spreads. Based on prices over the weekend, it should be possible to do this as a wash or a small credit on the premiums.

    Possible Outcomes

    If the stock is between $35 and $38 at expiration in May, both positions expire worthless, and there will be little if any profit or loss on the trade. Under $35, I will be the proud owner of some additional shares, which I'm willing to hold since I think the stock is likely to recover within the next two years.

    Between $38 and $41 at expiration, the trade makes pretty good money. I'm already long the Jan 2016 30 calls, so I might react to an upside move by selling the 38 calls, which would pick up some time premium, and leaving the 41 calls covered by the 30 LEAPS. Never a dull moment.

    Tags: COH, Options
    Dec 21 12:36 PM | Link | 2 Comments
  • Gauging Financial Stress In The Wake Of The Oil Crash

    We've seen some fairly alarmist articles, loaded with emotional words, prophesying dire consequences from the oil crash, with contagion extending throughout the economy. Let's take a look at the St. Louis Financial Stress Index:

    (click to enlarge)

    So far, financial stress remains at well below average levels. Bear in mind, it is presented in standard deviations, so that a level of -1.075 shows that stress is well below average, which would be 0.0. Just eyeballing the stress levels at the onset of the last two recessions, it would need to be in the +1 area before real trouble starts to develop.

    Next Question - Market Level

    (click to enlarge)

    I did the work a while ago, and won't update it. However, you get the general idea. The lower stress, the higher the market. The market level is estimated by using a ratio of S&P 500 to GDP, assuming it is normally distributed, and scaling it in standard deviations, for comparability to the STLFSI.

    As you can see, it includes a broad brush projection, that stress would go down, and the market up, in the same general proportion, which is what has happened. Of course it ends badly, in due course, but that's still a way down the road.

    Before panicking at any point over the next six months, it would be a good idea to check the STLFSI, which is updated weekly. Here's the link.

    Tags: SPY, OIL, USO, Energy
    Dec 14 8:27 AM | Link | 2 Comments
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