Pessimism leads to opportunities.
Another day another opportunity to earn a big cash payout just for agreeing to buy a strong business at a steep discount. The company faces many challenges that should be priced into the stock already and this trade setup offers additional margin of safety.
Tapestry (TPR) is a $9 billion luxury-fashion brand.
Put selling educational break:
To sell a put you pick a strike price (this is the stocks reference price and it is the price you will pay for the stock under certain conditions) and a time frame. For the risk that someone will "put" (sell) the stock to you at this price you earn income upfront called a premium payment. This payment reduces your risk.
Right now Tapestry offers a great opportunity for put sellers. The company began as Coach but changed its name after acquiring Kate Spade in 2017. Through 1500 stores around the world, Tapestry sells handbags, wallets, clothes, footwear, jewelry, and other high-end accessories.
The company continues to generate record sales now over $6 billion with a big 13% profit margin. Allowing the company to generate over a billion dollars in free cash flow. Such is the life of company's with luxury brand recognition.
Competition and tariffs have weighed on Tapestry's share price. These real concerns will hurt the business in the short term but I believe the market is overreacting.
The stock trades at the cheapest level in decades using the EV/EBITDA ratio and the EV/FCF ratio. The EV/EBITDA ratio compares the market value to earnings and the EV/FCF ratio compares market value to free cash flow. Enterprise Value(EV): total market value of a company market cap + debt - cash. EBITDA: Earnings before interest, taxes, depreciation and amortization (tries to avoid some of the manipulative earnings practices of company management). Free Cash Flow (FCF): FCF is the cash a company earns minus its capital expenditures. This the is money left over to pay shareholders dividends and stock buybacks after the company has invested back in the business to current and future growth. Today the company trades with a 7.5 EV/EBITDA and 7.5 EV/FCF. This is dirt cheap compared to most companies in the S&P500 and it is a historic low for the company.
Trade details:
Sell to open the August 16, $27.50 puts on Tapestry for $0.60 using a limit order for an upfront payment of 2.2% and agree to buy shares at much lower prices than in the open market.
At expiration is shares are above $27.50: put sellers will keep the $0.60 for a 15.9% annualized return.
At expiration is shares are below $27.50: put sellers will buy shares at a 12.6% (strike price - option premium compared to current stock price).
Use a stop loss at $24.50. Protect your capital by only taking a 8.9% loss based on adjusted cost basis. Shares trading below $24.50 will be at a long-term low. Exit for a small loss.
Tapestry owns two of the most popular luxury brands in the world, the business is growing, and the company pays a large dividend yield. With the stock trading near its cheapest levels in its history the time to generate cash by selling put options is here.
Cheers to your health and wealth.
Disclosure: I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article. The information provided should NOT be considered advice. The topics discussed are risky and have the potential to lose a substantial amount. I am not an investment professional and therefore do not offer individual financial advice. Please do your own research before investing.