EOT trade alert July 11, 2014

| July 11, 2014

July 11, 2014

Trade Alert:

Buy KORS August 2014 $85 Puts at $2.65 or better

Company Background:

Michael Kors Holdings (KORS) is a specialty retailer of men’s and women’s apparel and accessories.

Short-Term Catalyst:

KORS has successfully gained traction in the ultra-competitive world of retail fashion.

The company has done a great job of establishing brand recognition.  They have used a combination of new store growth, advertising, and competitive pricing to lure customers away from the competition.

Last year the company grew revenue 52% while same store sales grew an impressive 26%.

Many analysts expect these tremendous growth rates to continue.  But I’m not buying it.

More the 80% of KORS sales come from North America.  The company now has more than 400 stores in North America.  And it’s beginning to reach a saturation point… in other words, the new stores aren’t likely to deliver the same bump to sales as investors have come to expect.

What’s more, KORS is facing a major headwind to their growth…

Right now we’re seeing a slowdown in overall retail sales in the US.  The latest readings on foot traffic at retail outlets show fewer people have been visiting retailers lately.  This funk in retail spending is likely to have a big impact on KORS same store sales.

In fact, consumer spending rose a paltry 1% in the first quarter.  And stocks in the consumer discretionary sector saw massive earnings estimates cuts.

As a result, investor sentiment has soured toward the entire consumer discretionary sector.

Since reaching a high of $101.04 in February, KORS has been trending lower.  At a current price of $88.26, it’s more than 12% off those highs.  And the selloff is picking up steam.

KORS is now poised to test support around $85, and if it doesn’t hold there, it could quickly fall back to around $80 per share.

The combination of poor investor sentiment, weak foot traffic at US retailers, and bearish technical setup are all working against KORS’ share price.  Let’s grab put options on KORS now to profit from the coming drop.

Trade Details:

Underlying Stock Symbol: KORS
Current Bid-Ask Price: $2.35 – $2.50
Option “Buy Up To” Price: $2.65
Break-Even On Stock At Expiration: $82.35
Maximum Risk Per Contract: $265


Exit Strategy:

KORS is trading at $88.26 per share.  Resistance levels will be at $90.00 and again at $95.00.  Remember, we want this stock to move lower.  Support levels will be at $85.00 and $80.00.  Conservative investors should look to exit at the first support or resistance level.  Aggressive investors may want to hold for a bigger move.



Category: EOT Trade Alert

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