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Coach Ready to Trot Higher

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The following is a sample alert sent to subscribers of Steve Smith's Optionsmith earlier today.

Coach (COH) was benched after last quarter’s poor earnings performance. But now after sitting in the dog house for a few weeks, it seems to be building a nice base along the double bottom at the $48 level. I think the spring will prove better season then the winter did. I’m doing something a bit unusual by starting a bullish position in two separate expiration months. Both are straight up call purchases. Specifically;

The options are relatively cheap with a 25% and 30% implied vol for March and April respectively. The higher level in April represents not only the longer time horizon, but that it encompasses the scheduled April 17th earnings report. Both levels are near 52-week lows.

The company’s last miss was blamed on weather, from too warm to then too wet with Storm Sandy.  But the real issue and concern is in Asia, specifically, China, in which the brand has lost some of its aspirational value to names like Gucci.  Earnings reports from Michael Kors (KORS) blowing it out again, jumping some 11% this morning and Fossil (FOSL) shows the middle to high end consumer is still spending on aspirational and accessories. 

Asia is still showing steady growth and that means more middle class consumers that can aspire to COH which is still a worldwide recognizable brand.   Assuming they get their inventory in control for the spring selling season the stock could enjoy significant upside.

On a more fundamental level the stock is cheap on a with a forward P/E of 13.5 while sporting 21% profit margin and debt as just 2% to cash and equity.  There is more than modest 2.2% annual dividend at current rates.  The current short interest of 5.2% of float or nearly 4 days to cover stands as embedded buyers. 

I have an initial $55 price target and will use a close below $47.80 as stop loss for exiting the position.

The chart is showing a double bottom near $48 holding.  This represents a good risk/reward.

Click to enlarge

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POSITION:  Position in COH options.