Wednesday, June 20, 2012

FL: A value stock play

Foot Locker Inc. (FL) sells athletic shoes and clothing through 3,369 stores in the United States, Canada, Europe, Australia and New Zealand.

The New York City company's strategy is to site its retail outlets in malls, and I have certainly never seen an American mall without a Foot Locker. Malls and FL go together like love and marriage or peanut butter and jelly.

I'm looking at FL today because it was picked by the investment research company Zacks as its Value Stock of the Day, a high honor that Zacks makes available to non-subscribers as well as those who pay for premium access.

I haven't read the Zacks report yet so that my analysis can be independent. You can read the report here.

I'm not normally a value stock sort of trader. I'm a charts guy. I am, however, an eclectic trader. I never met a chart that wasn't worth reading, no matter what rationale brought it to my desk.

On the chart, Zacks ended a strong leg up from August 2011 by faltering last March. From that point the price moved sideways into May, dipped below the $28 level, and then gapped up and rose to a high of $33.29. It then corrected again, in a downtrending zig-zag that bottomed at $29.15 on June 18, and it has since traded mainly within the range set that day.

There are several overlapping trends at work here. The May correction ended by not breaking the uptrend, because it set a low higher than that bottom of the correction that began in March.

But it also internally counts as a clear downtrend, with a lower high and lower low in comparison with the May peak.

To complicate things more, of course, the rise from 2011 into March is part of a broader uptrend beginning with the recession bottom set in 2009, and the recent peak is at the ceiling of a sideways trend that has been in force for at least 20 years.
"Wait a bit, Tyek," Farad'n said. "There are wheels within wheels here." -- Children of Dune, by Frank Herbert. 
Charts are never simple. They're as complex as the courtly machinations of Herber's Dune universe.

Foot Locker has return on equity of 14%, below growth stock territory but still quite respectable. Long-term debt is a mere 6% of equity, a very low level.

Institutions own 92% of shares, and the price is below parity with sales. It takes only 78 cents in shares to control a dollar in sales.

Earnings tend to peak in the 2nd quarter -- athletic stuff tends to fly off the shelves in the spring. The last two 1st quarters have shown accelerating earnings.

Foot Locker has been profitable the past nine quarters, after some losses in the depths of the recession, and each of the nine has shown an upside earnings surprise.

On average, FL trades 2.2 million shares a day. This supports a wide selection of options with adequate open interest and fairly narrow bid/ask spreads.

Implied volatility stands at 32%, about the middle of the six-month range and has been stair-stepping lower since mid-May.

Options traders are pricing in confidence that 68.2% of trades will occur between $27.02 and $32.48 over the next month.

Nearer term, the stock is trading in the fair price range calculated on the basis of the last five market days. It's a fairly narrow range, from $29.48 to $29.98, because of a small sideways trend that kicked in last Thursday. The largest number of trades have occurred at $29.76.

Foot Locker next publishes earnings on Aug. 13. The stock goes ex-dividend July 11 for a quarterly payout yielding 2.24% annualized.

Decision for my account: I like FL as a bull play. The question is how best to play it. Because of the relative high dividend, and its proximity in time, I think that FL best goes as a covered call -- buying shares and selling at-the-money July calls against them. Selling the $29 call lowers the basis by $1.40 or so, which is a good thing. The 18 cent dividend lowers the basis a bit more. 

I'm convinced, and I opened a covered call position on FL a short time ago.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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