The market’s recent rebound off of the post election sell-off has been fairly impressive. But it should be noted that it has been on historically light volume, and crucial resistance in the S&P 500 at the 1415 level (or $141.50 on the SPDR Trust
(NYSEARCA:SPY)) has yet to be cleared and closed above. This is to say nothing of all the well-known macro issues spanning from the US fiscal cliff, to eurozone debt, to Middle East tensions that create headwinds. And of course, the final arbiter of stock values should be earnings and this past quarter’s results showed a significant slowdown especially in top-line or revenue growth across a multitude of industries.
For a long-term buy and hold investor, the prudent move might be to reduce risk by simply moving more into cash (and we know what that is worth), or to hedge by buying some downside protection via put options, which come with a cost and drag down performance even in a flat to slightly higher market.
But for more active traders brimming with confidence and a healthy ego (but not stubbornness or hubris, mind you), adding a few bearish positions to gain downside exposure is a good way to diversify portfolios and potentially outperform the market. In the coming days, I’ll identify three companies that I think warrant a bearish position.
To keep it diversified, they are in three different industries -- and to keep the ego and hubris out, I’m using option strategies that will limit losses should the bearish thesis prove wrong. Here I submit the first of the three little bears.
Too Little Value
(NYSE:TIF) is known for its little blue box, which is supposed to provide givers and receivers with mutual satisfaction and appreciation for both the thought and expense that went into the gift. The problem: Several trends indicate that not only will sales this holiday season be poor, but sales in general have lost their luster. The company reports earnings this Thursday, but I’ll be playing it for a decline after the holiday season, which I’ll describe below.
While analysts and the media are hyping the blow-out black, blue, and green Thanksgiving weekend sales, the fact is that value has been the driver. Best Buy
(NYSE:BBY) would not have had anyone waiting outside its door if not for the possibility of scoring a 40” flat screen for under $200. Tiffany is not in the habit of discounting to drive traffic. Most surveys show that people plan to spend around $740, which is the same or fractionally less than last year.
Plus, the most popular gifts by far are electronics. With some high-end devices from Apple
(NASDAQ:APPL), or even whole integrated systems from Harman
(NYSE:HAR) commanding triple-digit prices, both wealthy and younger consumers can give a “cool” gift without seeming to scrimp. For those that still want the romance of a piece of jewelry, we once again would favor the discounters such as Zale
(NYSE:ZLC) or Blue Nile
(NASDAQ:NILE), which offer the better value proposition. They also have much better online presence, which as we know is becoming increasingly important to all retailers. This is particularly important for companies who sell something that can said to be essentially a commodity or easily comparable, such as items made of diamonds or precious metal.
Finally, the global demand simply looks weak.
A stroll down Fifth Avenue past Tiffany's flagship shop this weekend showed traffic that seemed less than a typical weekend during the spring wedding season. Europe is dead in the water while Asia seems more infatuated with Gucci and other luxury brands.
Be aware that the company is set to report earnings this Thursday, November 29, and I don’t think the outlook will be upbeat. Even if the stock does hold up, I think once the holiday numbers start rolling in after the New Year, it will be set for a decline. The stock is running up to resistance around the $64 level and it is in danger of putting in a reversal today.
I don’t want to play this week’s earnings so I’m using January options to give some time for my thesis to play out. I have a downside target of $57 looking at setting up a put spread in the January options to capture that move. Specifically;
- Buy the January $62.50 puts for $3.30 per contract.
- Sell the January $57.50 puts for $1.40 per contract.
This is a $1.90 net debit for the spread. This represents the maximum loss that would be incurred if shares of TIF are above $62.50 on the January expiration. The maximum profit is $3.10 and this profit would be realized if shares of TIF are below $57.50 on the January expiration.
No positions in stocks mentioned.
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