Following the Foot Locker debacle earlier this week, there could be more turmoil in the retailer space. We’ll look at an options trade to capitalize on that. But first, a little education on how I come up with my investing ideas from a fundamental standpoint. Fundamental analysis is very important for long-term investing. Investors want their assets to grow, so presumably they want to invest in companies that are growing as fast as, or faster than the economy overall. Investors want to earn an attractive return, so whether those earnings are distributed to investors in the form of dividends, or retained by the company to reinvest in the business, presumably the income of the business relative to the price paid for it is also important. Because publicly traded companies provide quarterly financial reports, historic revenue growth and earnings multiples are available to everyone. Every investor should examine the financials of the businesses they trade and invest in, but it’s also important not to overestimate how effective that analysis is as a trading tool for a couple reasons. First, if information is available to everyone, the insights it provides, however important they may be to an investor, are not unique. Second, financial information is, by its nature, backward looking. Company management is reporting what has happened. To the extent that they can, some management also provides forecasts in the form of forward looking statements and guidance, but here too, that information is provided to all investors, and again is not unique. Next shoe to drop in retail? Earlier this week, I wrote that Foot Locker ‘s outperformance relative to Nike was hard to comprehend. After all, if the shoe manufacturer was providing an unappealing forecast, how good could the retail sales of those same shoes be? Foot Locker’s earnings provided the answer, and they weren’t good, and the stock fell 30%. What could be the next shoe to drop? Well, Academy Sports (ASO) fell in sympathy, down nearly 5% since last Friday. The company reports in two weeks. The options market is now implying a move of 10% after it reports, but still the stock is not far off all-time highs. More immediately though are earnings for Dick’s Sporting Goods (DKS) , which is reporting next week on the 14th, also implying a move of 9%. Dick’s did not fall in sympathy with Foot Locker as Academy did, and admittedly Dick’s is a very different business than Foot Locker. They are a market leader, operate much larger stores selling a broad array of sporting goods and have been growing. Observe that their revenues have more than tripled over the past 10 years even as Foot Locker has languished: That said, broader economic trends, while they may not affect all businesses equally, still matter. ASO 1Y mountain Academy Sports, 1 year My thinking is that if one owns either DKS or ASO, hedging them at or near all time highs with this backdrop is probably advisable. As an example, consider this put spread in ASO which not only captures their earnings, but Dick’s as well because Dick’s reports a week earlier. The trade: Bought March 22 $70 ASO put Sold March 22 $60 ASO put DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
This story originally appeared on CNBC
