1 Retailer to Buy This January

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Depending on who you listen to, the annual holiday shopping season was rather weak.  Apparently all these fiscal cliff worries have made consumers a bit reluctant to shell out as much as retailers had hoped they would this year.  Despite retailers feeling a pinch, there is still good money to be made by investing in retail.

Because of the volatility from the fiscal cliff and soon to be released holiday sales data, option premiums on many retailers are enticing.  In the past I’ve made good money by taking advantage of these elevated premiums to write options on fashion retailer Guess? (NYSE: GES).  A prior trade in my virtual “No Drip, No Mess” Portfolio just expired and I think that it’s time to write another round of puts.

The Trade
Writing puts is an excellent way to buy a stock cheaper or at least earn some income in the process.  For Guess writing a March $23.80 strike put would pay you around $155 apiece.  That’s a 6.5% yield in just less than three months’ time (take that bond market!).  If Guess is below the strike price at expiration those shares would be assigned, while a price above the strike sees the put expire worthless.  Either way, the generous income is yours to keep.

If this second Guess trade expires without being assigned my portfolio would have made more than 12% of income in just six months on the name.  That’s without even owning any shares.  Welcome to the wonderful world of writing options.

So Why Guess?
While the malls are filled with hot retailers that you could buy, Guess is a once hot retailer that’s simply been beaten down to the point where it’s a real value.  However, despite selling in value territory the company still has a long way to go in turning around their depressed margins in order to start growing income again.  That’s why I think options are the best way to play any Guess turnaround. 

Turning around an ailing retailer isn’t easy and investing in a retail turnaround isn’t for the faint of heart.  Malls and shopping centers across America are littered with the vacant storefronts of those that didn’t quite make it.  Guess is just one of a long list of retailers who’ve succumbed to the market’s weariness that it can return to profitable growth. 

There’s such a fine line these days as to which retailer is a value and which is just a value trap.  Investors who’ve tried to pick the bottom of J.C. Penney (NYSE: JCP), RadioShack (NYSE: RSH), Sears (NASDAQ: SHLD) or GameStop (NYSE: GME) have a very painful road to recovery as you can see from the returns over the past five years.

<img src="http://media.ycharts.com/charts/5ca935d7d3c238646972e10dc5b88dfe.png" />

GES data by YCharts

What sets Guess apart from these retailers is that the bulk of the company’s problems have been from its struggling European operations, not from missteps over here.  Sure, the North American revenue slumped 1% last quarter with comp sales down 6%, but European sales, which have been dragging the company down, actually rose last quarter.  That being said the 2% rise in local currency actually led to an 8% decline when converted to US dollars.  What’s important is that it appears that the company’s European operations aren’t going to sink the company’s shares any further.

Looking even further abroad, the company is seeing strong growth in Asia with revenue there up 16% last quarter.  That Asian strength coupled with at least stabilization in both North America and Europe are what will keep Guess from becoming a value trap like some of its peers.  What we’re looking for with Guess is short term volatility in its current range from which to profit with options and then the long term profits of eventual share ownership as the company starts growing its margins again.

Bottom Line
This is why writing puts on Guess makes a lot of sense.  A 6.5% yield in just three months on a company that’s not going to fall through the floor is very appealing in this low rate environment.  It’s for that reason that Guess is the one retailer I’m buying this January.

latimerburned owns shares of Guess and has written puts on GameStop. The Motley Fool owns shares of Guess?, GameStop, and RadioShack and is short RadioShack. Motley Fool newsletter services recommend Guess? and GameStop. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus