The Retailer That Traders Bet On
The following post is a Guest Blog by CNBC Contributor Brian Stutland.
Weaker-than-expected retail sales data released Thursday, which showed sales down 2.5 percent last week from a year earlier, prompted a sell-off in retail stocks. However, one option trader was buying calls on the weakness in Michael Kors.
With the stock at $48.80, the trader bought 870 January 55-strike calls for $0.55 each. This trade will profit if KORS is above $55.55 — or 13.8 percent higher — at January expiration.
Michael Kors has been a public company for just over a year, and is up over 80 percent in that time. Despite the run-up in its shares, the company was added to Goldman's "Conviction Buy" list last week, and remains a "Strong Buy" at Citi.
The expectation is for strong growth in the first and second quarters of 2013. Growth is expected to be driven by very selective discounting, increasing jewelry sales, and increasing brand awareness in North America.
(Read More: Did the Grinch Steal the Holiday Shopping Season?)
However, the stock does face some risks, such as slowing department store traffic, and potentially higher taxes on their target market due to the fiscal cliff. But KORS is well positioned to weather these risks.
Because their exposure to Asian and European markets is limited, the company is not subject to the slowing economies overseas. Also, by offering upscale products that are more affordable than the one that the highest-end designers like Prada and Louis Vuitton offer, its products are seen as an affordable luxury among consumers.
Within North America, KORS has plenty of room to grow, and the brand continues to gain consumer awareness due to the appearance of Michael Kors himself on the popular show "Project Runway."
Further growth in this stock will be driven by continued earnings growth. The stock is trading at 40 times trailing earnings, which shows that traders are betting heavily that these sales will continue their dramatic increase.
KORS is positioned to do better than many U.S. retailers in the first quarter of 2013. However, growth rates could slow if the U.S. goes off the "fiscal cliff," when automatic tax increases and spending cuts go into effect, or if economic growth stagnates.
Because of the stock's high price-to-earnings ratio, I would only play this stock with out-of-the-money calls, so I can keep my downside risk as limited as possible. KORS bounced off of its 200-day moving average on Thursday, and I think buying into the weakness with the stock at this support level makes sense. (Read More: Options Explained.)
Brian Stutland is Managing Member of Stutland Equities and a contributor to CNBC's "Options Action."
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