“Armchair Trader Series” Recommendations
- Week Beginning -
Monday, July 13, 2020

by Ian Harvey

IMPORTANT NOTE: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

You may also wish to read Stock Options Made Easy Trading Philosophy

ALSO

"Trading Capital Management"



Option Trade – Gap Inc (NYSE:GPS) Calls

Wednesday, July 15, 2020

** OPTION TRADE: Buy GPS JAN 15 2021 12.000 CALLS at approximately $2.20 (Up to $2.50).

Place a pre-determined sell at $4.40.

Also include a protective stop loss of $0.90.

The clothing specialist, Gap Inc (NYSE:GPS) has the potential to gain at 30% to reach almost $16 once fears surrounding the coronavirus outbreak are put to rest, based on a comparison of Gap’s stock trajectory over recent months with that around the 2008 recession.

Gap stock has surged by more than 20% since June 25 after the company announced that it has entered into a deal with Kanye West’s Yeezy brand to introduce a new clothing line, Yeezy Gap. The Yeezy Gap line is expected to appear in Gap stores in FY 2021.

Gap is contributing to the PPE shortage by using their excess production capacity to produce masks and protective gear. They are also using their global supply chain contacts to help procure additional masks and gowns.

In addition, the company has a freshly inked deal with IMG to be its first ever multi-brand, exclusive licensing representative. Essentially, IMG will use its global reach to introduce Gap brands to new audiences. The deal will initially focus on the Gap, Banana Republic, and Janie and Jack brands. The deal may eventually extend into additional categories such as baby equipment, baby care, home décor, textiles, and furniture.

As well, the cash-strapped company recently raised $2.25 billion in a debt offering. This gives the company the liquidity that should help it avoid bankruptcy.

The company has been making efforts to recover from the losses suffered by closures due to the coronavirus outbreak in the past few months. Notably, Gap witnessed a significant decline in in-store sales for all formats, with Old Navy down 60%, Gap down 64%, Banana Republic down 61% and Athleta down 50%, in the first quarter of fiscal 2020.

Nonetheless, the company witnessed strong online demand and leveraged its omni-channel capabilities to fulfill online orders and serve customers, even though stores remained closed since mid-March. This resulted in a 13% increase in online sales in the fiscal first quarter. Moreover, the company recorded online sales growth of 40% in April alone due to increased online demand. Brand-wise, there was a significant acceleration in the digital business for Old Navy and Athleta brands, recording increases of 20% and 49%, respectively.

About Gap Inc…..

The Gap, Inc operates as an apparel retail company worldwide.

The company offers apparel, accessories, and personal care products for men, women, and children under the Old Navy, Gap, Banana Republic, Athleta, Intermix, and Hill City brands. Its products include denim, tees, button-downs, khakis, and other products; and fitness and lifestyle products for use in yoga, training, sports, travel, and everyday activities to women and girls.

The Yeezy Deal.....

Keeping up with fashion trends is a constant challenge. However, West is an influential person married into the trendy Kardashian family. With the Yeezy deal, maybe Gap can set fashion trends instead of chasing them. That's certainly worth something.

The YEEZY brand, which was worth $2.9 billion as of April 2020, will offer affordable clothing for men, women and kids.

Assume revenue for Yeezy Gap grows without detracting from the rest of Gap's business over the next five years, it is expected that Yeezy Gap will generate $1 billion in annual sales by then. The company had $16.4 billion in sales in fiscal 2019 across its portfolio of brands. Therefore, Yeezy Gap will add about 6% to the company's top line in five years, if everything goes according to plan.

Analysts at Bank of America, argue that the Yeezy Gap line coming in early 2021 will be beneficial, providing a chance to rejuvenate a “challenged brand.”

The Yeezy range is also incentivized to produce more volume for Gap, given royalties and potentially equity will be paid based on sales achievements.

Calling the deal "brilliant," Susan Scafidi, the founder of Fordham’s Fashion Law Institute said that the upcoming line, which will include pieces for men, women, and children, could effectively elevate the company. She also stated that while the length of the decade-long deal is considered a very long collaboration, it could also increase the likelihood that the new Yeezy line succeeds and results in a high number of sales.

A New Business-To-Business Plan.....

Amid other strategies, the company has begun a new business-to-business (“B2B”) product program to supply cloth face masks to companies and organizations as they open up.  The masks are high-quality reusable, non-medical grade, which can provide protection to employees as they return to work.

Gap was quick in responding to customers’ need for masks amid the pandemic by using its large-scale capabilities to produce masks in bulk. The company’s latest move for the B2B program comes from the growing demand for masks from organizations like Gap itself to ensure a safe working environment for employees. It has so far sold nearly 10 million non-medical grade masks as part of the B2B program to employers in the City of New York and the State of California. Also, this includes the sale of masks to Kaiser Permanente and a leading consulting firm.

Past Earnings…..

GAP last announced its quarterly earnings data on Thursday, June 4th.

The apparel retailer reported ($2.51) earnings per share for the quarter, missing analysts’ consensus estimates of ($0.67) by ($1.84).

The business had revenue of $2.11 billion during the quarter, compared to analyst estimates of $2.35 billion. GAP had a negative net margin of 5.47% and a negative return on equity of 8.63%. The company’s revenue for the quarter was down 43.1% on a year-over-year basis.

During the same quarter last year, the firm posted $0.24 EPS. As a group, sell-side analysts predict that Gap Inc will post -2.32 EPS for the current year.

Influencing Factors…..

Gradual store openings and the new deal with Kanye West have provided a boost to the company’s stock movement.

Gap stock declined from levels of around $13 in October 2007 (the pre-crisis peak) to levels of around $8 in March 2009 (as the markets bottomed out) - implying the company’s stock lost as much as 40% from its approximate pre-crisis peak - less than the broader S&P, which fell by about 51%.

However, Gap stock recovered strongly post the 2008 crisis to about $16 in early 2010 - rising by 100% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

Keeping in mind the fact that Gap stock fell 63% from the market peak on February 19 to the low on March 23 compared to the 40% decline during the 2008 recession, it is believed it can potentially recover by 30% to levels of $16 once economic conditions begin to show signs of improvement. This marks a near-complete recovery to the $17-level the stock was at before the coronavirus outbreak gained global momentum.

And, Gap already does well online. It had $4 billion in annual e-commerce sales prior to the pandemic, and its online operations have surged during the outbreak -- up over 100% year over year in May.

Also, it is moving ahead of the track with its store-reopening plans, and expects to witness strong online and in-store momentum in the second quarter.

The company had been witnessing robust store traffic and productivity at stores reopened through Jun 5, 2020, particularly Old Navy and Athleta. Moreover, it is operating more than 2,100 stores as mini fulfillment hubs through the ship-from-store facility and more than 500 stores as curbside pickup locations, a capability launched during the COVID-19 crisis.

Insider Trading…..

John Strain acquired 5,500 shares of the company’s stock in a transaction that occurred on Tuesday, June 9th. The stock was purchased at an average price of $12.84 per share, for a total transaction of $70,620.00. Following the completion of the acquisition, the insider now owns 7,005 shares of the company’s stock, valued at approximately $89,944.20.

So…..

Gap should be able to weather the current storm. The Covid-19 pandemic will likely accelerate decisions that companies were going to have to make anyway. While that is not good news for some employees, it could be very good news for shareholders.

Gap has a debt-to-equity ratio of 2.84, a quick ratio of 0.58 and a current ratio of 1.23. The firm has a market cap of $4.44 billion, a PE ratio of -5.33 and a beta of 1.51. The firm’s 50 day moving average price is $10.85 and its two-hundred day moving average price is $12.39. Gap Inc has a 52-week low of $5.26 and a 52-week high of $19.86.


Option Trade – Monster Beverage Corporation (NASDAQ:MNST) Calls

Tuesday, July 14, 2020

** OPTION TRADE: Buy MNST DEC 18 2020 75.000 CALLS at approximately $3.80 (Up to $4.50).

Place a pre-determined sell at $7.60.

Also include a protective stop loss of $1.55.

Beverage demand has held up during the COVID-19 pandemic shutdowns and stay-at-home orders, while the maker of energy drinks Monster Beverage Corporation (NASDAQ:MNST)'s grocery store and gas station sales channels have benefited. The stock has performed remarkably well during the coronavirus panic sell-off and has had a sharp rebound during 2020. Rising from $57 a share eight months ago to approximately $70 y, Monster's +25% gain has far outpaced the equivalent S&P 500 total return of +6%.

This advance is expected to continue.

Monster remains one of the most profitable operating businesses in the beverage industry, and its entry into alcoholic beverages wouldn't change Wall Street's equity valuation much.

If growth continues or accelerates from an expansion in its overseas footprint and the introduction of drinks in new categories, Monster's current valuation is very attractive.

Monster Beverage is looking to enter into a partnership with a major beer distributor to develop a new hard seltzer brand. Stifel Nicolaus analyst Mark Astrachan told clients in a note that he expects the new product to launch as soon as early 2021.

Astrachan was upbeat on the prospects of the new drink, believing the spiked seltzer could deliver as much as $76 million in new revenue for the beverage company. "We also think the company could launch a non-alcoholic sparkling water under the Monster brand while the alcoholic version will be a new brand, like Reign," he said, referring to Monster's fitness beverage that captured a 3% share of the market within a year of its release.

About Monster Beverage Corporation…..

Monster Beverage Corporation, through its subsidiaries, develops, markets, sells, and distributes energy drink beverages and concentrates in the United States and internationally.

It operates through three segments: Monster Energy Drinks, Strategic Brands, and Other. The company offers ready-to-drink packaged energy drinks, carbonated energy drinks, non-carbonated dairy based coffee and energy drinks, non-carbonated energy shakes, and non-carbonated energy drinks primarily to bottlers and full service beverage distributors, as well as sells directly to retail grocery and specialty chains, wholesalers, club stores, drug stores, mass merchandisers, convenience chains, food service customers, and the military; and concentrates and/or beverage bases to authorized bottling and canning operations.

Influencing Factors.....

Monster has been rapidly expanding in markets outside the United States. It has distribution agreements with Coca-Cola (NYSE:KO) system bottlers and a number of independent overseas bottlers to now reach 153 countries and territories worldwide. The push to dominate energy drinks globally has already boosted revenue and income growth. During 2019, fully 33% of sales originated outside the U.S., up 5% from 2017. In terms of incremental sales and income expansion, foreign demand has led the way.

New drinks, especially alcoholic choices, may soon open up enormous growth potential. Management talked about the odds increasing of its entry into alcoholic and cannabis beverages last year in a Wall Street Journal article. Bars and individuals have mixed Monster energy beverages with alcohol for years. However, Monster has been under a non-compete contract with Coca-Cola that prevents the brand from introducing any non-energy drinks until later in 2020. The first new entry is anticipated to be a seltzer.

Last week, Stifel analyst Mark Astrachan mentioned the added value such a product would have for sales at the company, sold through a large national beer distributor.

Monster's higher-than-typical valuation on operating results is its stellar and liquid balance sheet; with $2 billion in cash and current assets vs. just $1 billion in total liabilities.

Past Earnings…..

Monster Beverage last released its earnings results on Thursday, May 7th.

The company reported $0.52 earnings per share (EPS) for the quarter, beating analysts’ consensus estimates of $0.48 by $0.04. Monster Beverage had a net margin of 26.07% and a return on equity of 27.77%.

The firm had revenue of $1.06 billion during the quarter, compared to the consensus estimate of $995.97 million.

During the same period in the previous year, the firm earned $0.50 earnings per share. Monster Beverage’s revenue was up 12.3% compared to the same quarter last year.

Future Earnings…..

Monster Beverage is expected to announce its next quarterly earnings report on Wednesday, August 5th.

Wall Street brokerages expect Monster Beverage to announce $0.48 earnings per share for the current quarter. Monster Beverage reported earnings of $0.53 per share during the same quarter last year, which indicates a negative year-over-year growth rate of 9.4%.

Also, analysts forecast that Monster Beverage will announce $996.58 million in sales for the current quarter. Monster Beverage reported sales of $1.10 billion during the same quarter last year, which would suggest a negative year over year growth rate of 9.4%.

Analysts Outlook…..

Monster Beverage stock target price was raised by Morgan Stanley yesterday to $75.00. The analysts previously had $70.00 target price.

Monster Beverage had its price target raised by analysts at Bank of America Corp from $70.00 to $80.00 on June 4. They now have a “buy” rating on the stock.

Several equities analysts have recently commented on the company…..

  • Stifel Nicolaus reaffirmed a “buy” rating and issued a $77.00 price target on shares of Monster Beverage in a report on Monday, June 15th.
  • Guggenheim upped their price target on shares of Monster Beverage from $60.00 to $66.00 and gave the company a “buy” rating in a report on Tuesday, May 5th.
  • Deutsche Bank upped their price target on shares of Monster Beverage from $73.00 to $75.00 and gave the company a “buy” rating in a report on Monday, June 1st.
  • Finally, UBS Group upped their price target on shares of Monster Beverage from $51.00 to $52.00 and gave the company a “sell” rating in a report on Friday, May 8th.

One equities research analyst has rated the stock with a sell rating, six have issued a hold rating and eleven have assigned a buy rating to the company’s stock. The company has a consensus rating of “Buy” and an average price target of $68.94.

So…..

Shares of Monster Beverage traded down -$1.10 on Monday, reaching $70.55. 2626956 shares of the stock traded hands, compared to its average volume of 2010649. The firm’s 50 day moving average is $68.53 and its 200 day moving average is $63.00.

Monster Beverage  has a 12 month low of $50.06 and a 12 month high of $73.43.