Friday, November 03, 2006

Calls of Note Part 2

Deutsche Bank commenting what they call "silly season" for retailers as the retail stocks tend to be very volatile around the holiday season. As the holiday season approaches, investors (and analysts) can become very nervous given the importance of 4Q sales on full-year financial results. This leads to abnormal swings in stock prices, or what they call the "silly season". However, firm believes nimble investors can make money around this volatility, with our analysis highlighting three trading strategies to consider, including a look at some ndividual names.

Strategy 1: Play the retail index volatility, particularly for Jan/Feb gift card trade

The retail index tends to be volatile from November 15th through the end of February, by which point most retailers have reported holiday results. Firm believes over the past five years, this volatility has been somewhat predictable, with the index underperforming the market from
mid-November to mid-December, bouncing a bit later in December, falling off in January, and then rebounding sharply in February. Firm calls the Jan./Feb. movement the "gift card" trade and it has worked in three of the past four years.

Strategy 2: In December, own sub-sectors with less holiday sales exposure

For hardlines specifically, firm has found that the stocks with the most earnings leverage to the holiday season tend to perform the worst in December. They believe this occurs due to the heightened risks associated with companies that make a higher percentage of their profits over the holidays. For instance, the consumer electronics, home goods, and sporting goods sectors have typically underperformed the hardline group over the past five years, as these sectors tend to have more holiday earnings exposure. On the other hand, the auto parts, office products, and value retailers have outperformed other retailers and the market in general in December.

Strategy 3: Look at specific names with identifiable patterns - BBY, DKS, and SPLS come to mind

After strength in November, Best Buy (NSYE:BBY) tends to dip in December before reporting sales in January. Dick's Sporting Goods (NYSE:DKS) is similarly weak in December and January, but then strong in February. So, firm would buy those names on weakness. Staples (NASDAQ:SPLS) has outperformed the market in four of the past five years from November 15th through yearend, with the 3Q earnings report in mid-November likely the catalyst.

Notablecalls: Nothing outright actionable in this note. However, serves as a remainder that the retailers are extended and due for a pullback. As Wal Mart showed, there might be something rotten in the state of Denmark. BTW, don't get Deutsche's logic - if BBY and DKS are expected to be weak in December, why not suggesting shorting? Both charts suggest potential weakness.

1 comment:

BULL said...

Might jump into the Dec 55 puts....any thoughts?

Made nice quick $$$ earlier in week with Jan 07 55 calls, so not sure if market discounts the Dec numbers knowing the decline is artificial and ST.

WFMI already down 18+% at 8am looking for nice run on IACI if move occurs over 31.5 early and maybe handle forming on am looking closely at that potential runner.

Good job as always...Have a nice weekend