Top Trades for Mon, 25 Nov 2019 15:08 – LB

    0
    101
    psw-placeholder
    psw-placeholder

    LB/Calch – They finally decided to head higher after earnings and I hope the worst is over but HOPE is not a valid investing strategy and neither is needing a 50% pop to get even!  

    You have $26,656 worth of stock at $19.04 and you are down about $11,760 so the real question is – given you have decided to stick with LB, what's the best use to make of $26,656 to get $11,760 back?

    First of all, you can sell 20 of the 2022 $17.50 puts for $5 so that's $10,000 right there and worst case if assigned is $35,000 less $10,000 is $25,000 so, if you cash in your stock now and sell 20 2022 $17 puts, you get $10,000 of your $11,760 back and are obligated for not one penny more than you are now and you drop your hurdle from $27 to $15 (44% lower).  Would seem very silly not to do that, right?  

    Since you now have the potential to own 2,000 shares at net $36,760 ($18.38) there's no point in keeping your 1,500 shares so that's done.   Now, the question is will you be happy to be (almost) even at $15 or are you now greedier than that and willing to put more money to work?  

    You put $38,360 (max risk) to work and got nothing for it last year so let's say it would be a shame not to make 20% so let's see how we can go for $10,000 without adding too much risk.  I see the 2022 $15 ($7)/20 ($4.60) bull call spreads are $2.40 per $5 so $4,800 (20) put to work there will pay $5,200 at $20 and 20 will pay goal at $10,400 but I would not over-commit – you can always take 20 now and add the $17.50/$22.50 bull call spread once you regret not taking 40 of the $15/20s in the first place.  

    So, the end result is that I'd cash the loss and pick up, as a new trade:

    • Sell 20 short LB 2022 $17.50 puts at $5 ($10,000) 
    • Buy 20 LB 2022 $15 calls at $7 ($14,000) 
    • Sell 20 LB 2022 $20 calls at $4.60 ($9,200) 

    That's a net $5,200 credit on the $10,000 spread so, as a new trade, it's got $15,200 (292%) of upside potential if LB is over $20 in Jan, 2022.  

    LB has been excruciatingly slow in their turnaround but, with the market cap down to $5Bn at $19 and earnings well above $500M (1/10th) – I don't mind waiting patiently for them to pull things together get back to the 10% profits they used to drop to the bottom line on their very steady $13Bn in earnings.  

    Year End 02nd Feb 2014 2015 2016 2017 2018 2019 TTM 2020E 2021E CAGR / Avg
    Revenue $m 10,773 11,454 12,154 12,574 12,632 13,237 13,060 12,993 13,229 +4.2%
    Operating Profit $m 1,743 1,953 2,192 2,003 1,728 1,237 976.8     -6.6%
    Net Profit $m 903 1,042 1,253 1,158 983 644 366 666.2 665.3 -6.5%
    EPS Reported $ 3.05 3.50 4.22 3.98 3.11 2.31 1.30     -5.4%
    EPS Normalised $ 3.05 3.50 4.22 3.98 3.11 3.23 2.80 2.38 2.38 +1.2%
    EPS Growth % +8.7 +14.7 +20.5 -5.7 -21.9 +4.0 +8.7 -26.3 -0.38  
    PE Ratio x           5.57 6.43 7.55 7.58  
    PEG x           n/a n/a n/a 7.83
    Profitability

    Bath and Body Works is growing nicely while Victoria's Secret is down a bit but Pink (VS kids) is doing very well withing so they only need to fix 1/2 of VS.  

    Also, they are paying out a $650M annual dividend – that's a bit wasteful as it's more than profits.  So, if they do cut it – I'll be happy to buy from whoever is dumping.