A Fabulous Trading Vehicle is Once Again 'On Sale'
Stock price plunges make people very nervous. ‘Buy Low – Sell High’ mentalities often go right out the window when the chance to purchase cheaply is actually thrust upon investors.
Urban Outfitters (URBN, Financial) was the dog of the day on Friday, Oct. 17, 2014, after pre-announcing that its fiscal Q3 (ends Oct. 31) would come in at about 50-cents versus 47-cents a year earlier, but short of a 53-cent estimate.
The flagship chain’s same store sales look to be down about 10% while revenue gains from the firm’s Free People and Anthropologie brands will partially offset the damage. URBN’s stock price wasted no time reflecting analyst angst with the firm, for embarrassing them by having missed their projections.
The stock gapped down, opening at $29.82. It then fluctuated in a daily range from $29.11 to $30.45. Friday's final decline came in at (-14.3%) taking URBN to its lowest close since the middle of 2012.
Only after the company's announcement, and with the stock trading dollars lower, did Goldman Sachs, Morgan Stanley, Janney Montgomery Scott and other brokerage firms downgraded their ratings on URBN. Canaccord Genuity lowered its price target from $49 to $47. Wells Fargo analyst Paul Lejuez noted, "We still berlieve in long-term prospects of their brand portfolio. However, we can't ignore near-term business pressures."
What good are downgrades at a multi-year low? Not one of those weasels was willing to reiterate their previous buy ratings at Urban Outfitters' new low.
URBN has now dropped 34.2% from 2013's all time high of $45. Is URBN now a stock to avoid or a good buy?
The company is debt-free. It has a fine long-term record. IN FY 2003 URBN posted split-adjusted EPS of $0.30. In FY 2013 they recorded best ever profits of $1.89 per share.
It now appears that FY 2014 will come in just pennies lower than that, at about $1.85. Next year’s estimate was trimmed about 7% after today's newsflash, from about $2.25 to $2.10.
Urban Outfitters thus trades for about 16x this year’s and only 14.1x the already reduced forward estimate. That compares with a (post-recession) 2010 – 2014 average multiple of 21.5x.
When business was booming URBN traded for P/Es as high as 23x – 25x.
Down years can, and will, happen with most fashion oriented companies. FY 2011 saw a 25.6% decline in earnings with the stock getting pummeled from $40.80 to $21.50. At 2011’s bottom URBN was available at 18.1x those depressed EPS. Intepid investors willing to buy when everybody was dumping saw better than a double within 18 months.
The Oct. 17 sell-off left URBN at an even better valuation than during 2011’s trough. The stock hasn’t been this cheap since the dark days of 2009. Buyers back then saw the stock exactly triple, from $13.60 to $40.80, in under a year and a half.
CNBC announcers were busy all day telling people that the shares had cratered and explaining why URBN is never going to be a good stock again. That’s just what they were saying in 2009 and 2011. History says they will be proved wrong this time around, too.
Outright purchase should work out well from from sub-$30. Option savvy traders could also consider selling URBN Jan. 2016, $30 or even $35 puts. I was able to get filled for $4.30 per share on the lower strike price this afternoon bringing my worst case entry point all the way down to $25.70.
Writers of the Jan. 2016, $35 puts could expect to receive at least $7.30 per share, the equivilent break-even to buying shares at $27.70.
Maximum profits for put writers would be keeping 100% of any premium dollars received. That will occur if URBN rebounds to above the respective strike price(s) sold. Until today, URBN had spent every single day of the past two years above $30. It remained north of $35 during more than 80% of that period.
The detailed multi-year chart shown earlier dated back just to Jan. 2010. Go back further and you'd see that URBN had an even scarier 59% decline from its 2005 peak to its 2006 nadir. It then proceeded to surge from $13.60 to $29.40 in about 8 months.
URBN is an excellent trading vehicle for those with 12- 24 month time horizons. Over that period Urban Outfitters could easily recapture at least the $35 - $40 area. Annual highs have touched at least $35.80 during each of the most recent seven calendar years.
Buying after damage is already done typically feels risky, but is actually the safest time to play. Selling puts, as an alternative to outright ownership, allows for an additional margin of safety while avoiding the need to ‘call the exact bottom’ in advance.
Disclosure: Short URBN Jan. 2016, $30 & $35 puts
