Coach Looking at Strategic Expansion
The stock market doesn’t always revolve around the technology sector, but it can sometimes seem that way when you look at what is talked about most in the financial media. The retail sector is also a key talking point, but not for the best reasons. Yet there are still some opportunities in retail, including luxury retailer Coach Inc (NYSE:COH).
The former go-to stock in the fashion apparel and accessories segment underwent a massive fire sale, plummeting to $11.41 on March 6, 2009, prior to the rally to come.
While the retail sector is still trying to find its way, especially in the face of the onslaught from online behemoth Amazon.com, Inc.(NASDAQ:AMZN), shares of Coach stock were trading at a new 52-week high of $48.35 on July 17, which means the stock price was up 36% since January 3. As of this writing, Coach stock is trading just a little lower than that July 17 high.
Coach stock is still well below its record high of $77.28 on March 30, 2012, but the technical and fundamental pictures are looking increasingly bullish.
A game-changing move for Coach may be its recent acquisition of Kate Spade & Co (NYSE:KATE) in a $2.4-billion deal. The deal is logical, as Coach has indicated it wants to diversify away from its core luxury market that caters more to older established consumers. (Source: “With eye on millennials, Coach buys Kate Spade,” Reuters, May 8, 2017)
The addition of Kate Spade adds a consumer market that is focused more on the youth and millennial market. The company hopes that the Kate Spade shoppers will eventually become a great base for the next generation of Coach shoppers. It makes sense to me.
Like many brick-and-mortar retailers, it has not been easy for Coach. Revenues fell in FY14 but rallied in FY16.
The company is expected to show muted revenue growth in FY17 of 0.3%, but revenue is predicted to rally by almost 35%, to $6.07 billion in FY18, driven by the addition of Kate Spade. (Source: “Coach, Inc. (COH),” Yahoo! Finance, last accessed July 14, 2017.)
Also Read: Best Ecommerce Stocks to Buy in 2017
Earnings are expected to follow revenues higher.
Technical Picture Points to Breakout for COH Stock
The long-term chart for COH stock shows a multi-year breakout at around the $43.00 level, including a bullish upside trading gap from $42.67 to $45.61 on May 8.
Chart courtesy of StockCharts.com
The $43.00 top was tested in March 2015, followed by July 2016. On both occasions, Coach stock failed to advance higher until now. The breakout was associated with rising relative strength and an upward-trending moving average convergence/divergence (MACD) indicator.
Next on the chart is resistance at $50.00, followed by the $60.00 level, which was last encountered in May 2013.
An Option Trade on Coach
As a trader, you can play the breakout via COH stock. Another strategy that limits the risk is via the buying of call options or establishing a bullish call spread.
Assuming you want a long-term horizon for the stock to rally, you can look at the January 2019 call long-term equity anticipation securities (LEAPS).
For example, the in-the-money $47.00 call last traded at $6.20, resulting in a breakeven price of $53.20. You make money if COH stock closed above $53.20 by the expiry.
Now say you want to reduce the exposure and are willing to accept a maximum profit. Under this scenario, you could establish a bullish call spread on Coach stock as follows:
- Buy Coach January 2019 $47.00 call for $6.20
- Sell Coach January 2019 $60.00 call for a premium of $2.10
The net cost is $4.10, or $410.00 per contract. The maximum profit is when Coach stock trades at $60.00, equating to profits of $890.00 per contract, or 141% in potential profits.