Channel Checkers: HOG and HOTT
by Insider Scoop - July 6th, 2009 1:59 am
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…