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3 Discount Retailers for the Impending Depression

Posted: 25 May 2020 04:30 AM PDT

The term depression may sound a little harsh, but the statistics are pointing that direction. The closures over the past couple months and the continued throttling of the economy is only going to keep any ability to truly normalize at bay. That being said, all of the restrictions mean that fewer companies will come out of this and provides opportunity for the survivors as their market share increases.

With reduced competition and a business model that is proven to be somewhat recession resistant, these retailers are in a position to continue their trends over the past many years.

What all of these companies, we're talking about discounters. Companies that specialize in delivering name brand products at lower prices. With millions of people unemployed and retailers stuck with an inventory overhang, it may create an opportunity for these companies to step up their game.

Discounter #1: TJX Cos (TJX)

One of the surprising developments throughout this process of closures is the lack of communication from TJX and others. I'm sure they were in a quandary as much as the rest of us, but the company began re-opening stores on May 2. Ernie Herman, president and CEO, discussed this period:

"We have been pleased to reopen as many stores as we have in May, as well as our e-commerce websites. Although it's still early and the retail environment remains uncertain, we have been encouraged with the very strong sales we have seen with our initial reopenings. We believe this very strong start speaks to our compelling value proposition and the appeal of our treasure-hunt shopping experience, as well as pent-up demand."

TJX has had very positive volume trends since the March low and the indication is that the price will trade above the February highs in relatively short order. The on-balance volume had already cleared the February level just before its earnings report on May 21.

Discounter #2: Ross Stores Inc (ROST)

I have to admit, I'm a huge Ross fan and I'm not just referring to the stock. The TJX CEO discussed the treasure-hunt experience and Ross probably does it as well or better than anyone. You can call it a treasure hunt, but I prefer to call it the "eat what you kill" model. You just don't know what you need until you walk through the doors. To my delight, Ross began opening stores on May 14, and our local store was one of the one the ones to open up. At the time, there were only stores opening in two states and new inventories weren't going to start being delivered until May 19. As a result, a good portion of the merchandise was marked down. CEO Barbara Rentler commented on their liquidity position:

"In response to the economic disruption created by this global health crisis, we quickly took decisive actions to increase our liquidity and financial flexibility. These included drawing down $800 million under our revolving credit facility, completing a $2.0 billion public bond offering, suspending our stock repurchase program, and aggressively cutting costs throughout the Company, including ongoing expenses and capital expenditures. Today we are announcing several additional actions, which include the suspension of our quarterly dividend program and reduced new store openings for the year."

TJX had previously shared a similar sentiment regarding the liquidity position as well. The point is that they can weather the limitations over the foreseeable future, where many retailers won't be able to.

The volume dynamics haven't been as positive as it has with TJX but have improved since the end of April. The near-term expectation is a retest of the February high of $125.

Option Traders May Have Found a Whale of an Opportunity with this Theme Park

Posted: 25 May 2020 04:30 AM PDT

Seaworld Entertainment Inc (SEAS) is hoping to begin opening some Florida facilities in mid-June. The company doesn't have a current reopening plan for California and isn't presenting at an upcoming Orange County Economic Recovery Task Force meeting along with Disneyland, which required a projected date to reopen.

Their recent earnings report on May 8 showed a wider-than-expected loss, despite furloughing 90% of its workforce. The company saw its attendance in 1Q drop from 3.3 million guests in 2019 to 2.3 million due to the closures. Mark Swanson, interim CEO, discussed the positive trend before the closures:

“In response to COVID-19 we took the extraordinary step to close all of our parks on March 16, 2020.  Prior to the closure of our parks, we had a strong start to 2020, with record-setting results through February."

The reaction to the earnings were muted before beginning to rally last week. The price broke through the April 29 high and posted the highest close since March 6. The volume trends have been positive too since the March 19 low.

On Friday, the option market started to pick up for SEAS. The option volume was over 3 times the average with over 50% of trades occurring at the ask or higher. There was significant buying on the ITM 29 MAY 20 $17 calls that traded around $1.

Action to Take: The stock is a little overbought in the near-term, but for investors willing to weather a near-term pullback, the potential move is to $25.

Speculators may want to consider the 17 JUL 20 $17 call for around $2.80. The option will be worth at least $8 if the price reaches $25 at expiration.

CEO Buys this Healthcare REIT Near 52-Week Lows

Posted: 25 May 2020 04:30 AM PDT

The GEO Group, Inc (GEO) is a healthcare REIT that specializes in U.S. corrections and detentions through leasing and operating facilities. The company's share price has struggled to gain traction after selling off in March. The current price is down over 50% since its 52-week high in June 2019. However, the price has remained stable over the past couple months and the company is currently paying a 17% dividend yield.

The CEO George C. Zoley currently owns 2.6 million shares. In May alone, he's added 254,850 shares in two different transactions at a price of $11.31 and $10.37. That amounts to a $2.88 million investment and a 10.8% increase in his holdings of GEO. He also added an additional 615,000 shares between February 24 and March 12, 2020.

Seeing a CEO buy shares shouldn't be the only consideration. However, the size of the activity should be an indication of some degree of confidence in the company and its business plan. The company does have a lot of leverage, but the type of facilities they're operating may provide a degree of predictability and the dividend yield is significant.

Action to Take: This is an attractive price and yield combination, but there could be further downside. As a result, taking a couple quarters of dividends to buy a put against your long stock provides a degree of certainty as far as risk. If you're buying 100 shares, you may consider buying the 18 SEP 20 $10 put for around $1.00. That provides a net cost basis of a little over $12 but provides with the ability to sell the stock at $10 if the price were to fall below that level in the next 119 days.
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