Top Trades for Tue, 21 Jun 2022 10:09 – LEVI and F


    Levi Strauss and Co. was founded in 1853 and they also sell Dockers.  They have 3,100 Levi stores (not Gap) and they did $5.7Bn in 2019 (made $395M), $4.4Bn in 2020 (lost $127M), $5.7Bn last year (made $554M) and expect $6.4Bn this year making $628M yet you can buy the whole company for $6.5Bn at $17.   Cotton costs have been killing them this year but they are likely to normalize going forward:

    They pay a pretty nice 0.40 dividend but so does F for a lot less money so we should stick with options for the LTP:

    • Sell 20 LEVI 2024 $18 puts for $4.30 ($8,600)
    • Buy 50 LEVI 2024 $18 calls for $3.50 ($17,500)
    • Sell 50 LEVI 2024 $23 calls for $1.65 ($8,250) 

    That's net $650 on the $25,000 spread.  That's an upside potential of $24,350 (3,746%) and it would cost us $20,000 more to be in the $10s, so it's not worth it as I think $23 is an easy target.  

    In the Morning Report, we discussed trade ideas for Ford (F):

    That's what we're punishing companies for now.  Inflation is causing companies to adjust and labor rates are rising but most companies are covering them with price increases that, so far, have not slowed down consumer spending.  More raises put more money into consumers hands but, looking at F, another $2.50 per day doesn't let you buy a Model T next week – it takes a while for these things to evolve – but "investors" today have no patience at all.  

    At $11.23, F has a market cap of $45Bn – even though they made $18Bn last year (not a typo).  This year and next year they expect to make a more normal $8Bn but that's still a p/e of 5.5 going forward.  F does have $94Bn in debts (net of $41Bn in cash) but that is the nature of their business and we assume it will take 3% more to service the debt going forward, so that will hit F for $3Bn a year and drop eanings down to $5Bn BUT, a lot of F's outstanding debt is for financing – so they may not be hit so hard by increased rates.

    Still, if we say they make $5Bn a year until inflation gets them back to their usual 5% Net Profits and we give them 10x in a non-panicked market – that's going to be a $50Bn valuation at about $12.50.  That's where we'd draw the line.  So, as a new play on F, I would like:

    • Sell 20 F 2024 $12 puts for $3 ($6,000) 
    • Buy 50 F 2024 $10 calls for $3.25 ($16,250)
    • Sell 50 F 2024 $15 calls for $1.40 ($7,000)

    That would be net $3,250 on the $25,000 spread so the upside potential, at $15 or above, would be $21,750 (669%) and we're starting out $6,000 in the money already.  Worst-case scenario is owning 2,000 shares of F at $12 and, if we lose the $3,250, our net cost would be $13.62/shar but then we could sell 2026 puts and calls and knock $4.65 off that price, right?  

    Meanwhile, F pays a nice 0.40 dividend so we could do the above as a stock play as such:

    • Buy 2,000 shares of F at $11.23 ($22,460)
    • Sell 20 F 2024 $12 calls for $2.45 ($4,900)
    • Sell 20 F 2024 $12 puts for $3 ($6,000) 

    In this case, we're in 2,000 shares at net $11,560 or just $5.78 per share and that makes the 0.40 annual dividend 6.9% while we wait to get called away at $12 ($24,000) for an additional $12,440 (107%) in profits – and that's at $12 – LOWER than the stock is trading now.   The worst-case scenario to the downside is you are forced to buy 2,000 more shares for $12 ($24,000) and then you are in 4,000 shares for $35,560 or $8.89/share – which is 20.8% below the current price.  Not even including the dividends.  

    When your worst-case scenario is something that sounds pretty good – then it's a good trade to make, right?  

    These are the kind of opportunites we get in a bear market because we are able to remain calm and do simple math while others are in a panic (a TA person would never buy F's chart).  There are many stocks we'll be able to take advantage of – our Members already have F in their portfolios but this is a rare opportunity to get in at rock-bottom prices if you don't have it already.