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Channel Checkers: HOG and HOTT

How would Phil trade the Channel Checkers report (below)?

The question we have to ask with HOG is "how much of this bad news is already priced into the stock?" 

HOG is trading at 1/3 the average price of the first 3 quarters of 2008 and 2009 earnings are expected to be less than 1/2 of last year.  The company is projected to earn just .26 in Q2 vs .95 last year yet "only" 36% of the respondents say business is worse than the same time last year and 12% say it is better.  Just because you hear a negative sounding report on a stock does not mean you should automatically be shorting it…

On the whole, I would be hoping for poor earnings and a sell-off as an opportunity to buy HOG back near the lows but I don’t see betting them to go lower as .26 is a very low bar to beat.  In the past 3 months, HOG has picked up a "sell" rating from one analyst and now has 3 "underperform" ratings,  9 "holds," one "buy" and 4 "strong buys" so there isn’t all that much enthusiasm for the stock.  18% of the stock is already sold short and that is 8 days of average trading so an upside surprise or raised guidance can cause a squeeze. 

To initiate a speculative long play here, the Feb $17 calls can be bought for $2.22 and the Aug $16 calls can be sold against them for $1.20.  This is a position to "scale into," meaning consider this a first round entry.  Ideally, the earnings will not be thrilling and the caller will be wiped out, leaving us with the Feb $17s at net $1.02 at which point they can be added to or rolled down to a lower strike for a low average entry.  Should HOG surprise to the upside, we simply buy more Feb $17s and roll the callers up to higher strikes.  We’ll follow through on this play as it’s a good earnings exercise.

HOTT also has very low expectations.  Analysts expect a 0.05 loss for the quarter although, for the year, the company is expected to earn .45 a share, not much below last year.   23% of this stock is already being shorted and there are 22,334 open Aug $10 puts vs. just 1,228 Aug $10 calls so to say no one has any faith in this stock is a major understatement.  The May Same-Store sales report showed a 6.4% decline over last year while overall company sales were down 2.9% – this Channel Check indicates more of the same for June. 

Nonetheless, a combination of nothing but negative news and a low VIX have pushed the July $7.50 calls down to .17, which make  a fun speculative bet on an upside surprise.  This is the kind of bet we call a "craps roll," which is to say you will probably lose and you should not bet more money than you would on a roll of dice in Las Vegas but, at $17 per contract, the stock was at $13.87 in April and, on the whole, the news hasn’t really changed since then, just the sentiment so it’s not impossible to imagine a rise back to $8.50 on anything less than a 0.05 loss.

*****

Just in:  New report from the Channel Checkers featuring Harley and Hot Topic.

HOG: Negative

Harley Dealers See Business Declining in May and June

Ticker: HOG
Questions We Asked:
1. What is the best selling motorcycle model right now?
2. Are they sold out of any models right now?
3. How is business compared to this time last year?
4. Has there been an increase in sales in the past month? 
  • 36% of respondents cited some version of the Sportster as the top selling model right now. The 09 FLXH Street Glide was seen as the top seller by 16% and 12% see the Night Train Softtail.
  • 87% of respondents said they were not sold out of any models. 13% cited some models that were out of stock.
  •  52% of respondents say that business is the same as a year ago. 36% say business is worse while 12% say it is better.
  • 57% of respondents said that sales had not increased in the past month. 43% said they had. This mix of responses is a significant deviation from the trend we have seen across many of our covered companies in the past.
Conclusion of Channel Check: Harley dealers continue to see demand focused on their lower end models (from a price point perspective). Inventories appear to be sufficient to match demand. Business appears to be the same or lower according to 88% of respondents. The 57% citing lower sales in the past month should be a concern for investors as it is a sharp deviation in this answer set versus the past few months.
Catalyst for stock movement:
HOG Reports Earnings on 7/16/09
 
HOTT: Negative

Twilight Fading for HOTT

Ticker: HOTT
Questions We Asked:
1. Do you have Twilight clothes and accessories still in stock?
2. How is inventory compared to last year?
3. Is “twilight” apparel still the top seller or it is slowing down?
4. Are any of the “twilight” products being put on sale?
5. What % of accessory sales are twilight related?
  • 100% of respondents reported having Twilight related products in stock, although one store mentioned it had very little left.
  • 40% reported inventory had increased since last year, while 35% said it had decreased. 25% reported that it was the same.
  • 65% of respondents said that sales of Twilight related products were slowing down, while 35% continued to report it as a top seller.
  • 55% of respondents stated that Twilight products were being put on sale, with one respondent saying “everything Twilight” was going on sale. 
  • Respondents reported on average that 25% of accessory sales were Twilight related.

Conclusion of Channel Check: Hot Topic stores appear to have enough stock of Twilight specific apparel and are well stocked overall with merchandise. Twilight related products appear to be slowing down and marked down with discounts. 25% of sales in the accessory category are related to Twilight in our survey. It appears to us that the engine of strong growth for Hot Topic, which had been the Twilight movie merchandise boom, is slowing down in June of 2009.

Catalyst for stock movement:

HOTT Reports SSS for June on 7/8/09

 

BOB DYLAN NOT DARK YET

 

 


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