The past decade was terrible for most classic retail names. Yes, you heard that right, the past 10 years!
While most growth stocks even most value stocks produced hefty returns for investors, classic retail names such as GAP and L brands underperformed the market heavily and got most investors thinking that they could be destined for bankruptcy.
As online shopping got more popular in the past decade and consumers became more confident and eager to shop for clothes online, the classic retail names that had a strong presence in the shopping malls around the world got more and more irrelevant. It was definitely a very difficult time for retail companies that had invested lots of time, money and energy into commercial real estate properties and disregarded the importance of online shopping for the most part.
Some names such as GNC and Aéropostale could not survive through this transition and finally declared bankruptcy. Identifying and betting against such companies was almost perceived as a safe strategy until 2020 came around and one of the most hated bull markets in history began.
In the past year alone, names such as GAP, L brands, American Eagle Outfitter and Abercrombie and Fitch all rose more than 500% with no meaningful pullback and they continue to outperform the market.
So, what changed?
These are the names that have done extremely well in the past 20 years and have a created a very strong brand presence. These companies have shown great resilience and adaptability in a competitive and rapidly changing market and managed to stay relevant in the past two decades so naturally they invested in strengthening their online presence.
In the start of the global pandemic and lockdowns in 2020, consumers were forced to do most of their shopping online and all these four companies exceeded wall street’s expectations by producing great numbers and once again proving their resilience and adaptability to new market conditions. Once investors realized that these names have made a very strong brand presence in the past decades and are perhaps too big to fail, they rushed to buying their stocks hence the amazing returns that we have witnessed in the past year.
$GPS (Monthly)
$LB (Monthly)
$AEO (Monthly)
$ANF (Monthly)
what’s next?
As I stated earlier, these 4 retail names have had no meaningful pullback in the past year and if you are reading this article right now, chances are that you have missed the opportunity to take advantage of one of these sharp uptrends. Now the question is, will these names continue to outperform going forward? Or a sharp reversal in trend is around the corner?
As you can see on the monthly charts above, there is clearly no indication of a reversal in trend but if you buy here, you will be exposing yourself to unnecessary risk and potential downside volitivity. This might surprise most of you but I’m going to suggest to closely monitor these names for a potential long-term shorting opportunity.
YES, wall street was completely wrong about some of these companies and their brand presence have been much stronger than previously imagined however, you got to ask yourself how much have these companies have changed fundamentally? And are there any potential risks going forward?
As I mentioned earlier, these companies have done a great job of improving their online presence but with online shopping growing at a rapid rate, these names are faced with more competition than ever before.
In the past decade, these big companies were competing with other big companies that could afford expensive commercial real estate properties in major shopping malls and streets but with online shopping becoming more and more popular even smaller companies can build a somewhat strong online presence and become relevant. Additionally, the newer generations have basically no loyalty to these brands and prefer to buy clothes from newer or even smaller companies to have a more unique look.
I believe that with online shopping growing at a rapid rate, these classic retail name will be faced with more and more competition and hedge funds and so called “smart money” will eventually return to heavily shorting some of these names so allow me to share a trading strategy with you should an opportunity present itself.
A simple options trading strategy using LEAPS
It is my thesis that the fundamental picture of these companies hasn’t changed enough to justify a 500% in less than 15 months. These household retail names might be too big to fail but that does not mean that they can keep grinding higher indefinitely. As I stated earlier, there is no indication that a reversal in trend is about to take place other than the fact that these stocks have risen more than 500% with no pullback but we should still plan for potential trades in the future. Planning is critical in the game of trading and that’s how I make all my trades.
LEAPS, or long-term equity anticipation securities, are long-term options with expiration dates that are longer than one full year, up to three years. Should the characteristic of these sharp uptrends change, and we get an indication that these trends are coming to exhaustion, I want to pick up some long term put options in the form of LEAPS.
Abercrombie and Fitch is a company that reminds me of Aéropostale that declared bankruptcy a few years back.
Although, this company has demonstrated adaptability during the pandemic, I still believe their efforts won’t be sufficient to change their fundamental picture and they will have to compete with a multitude of smaller online companies and hedge funds could return to heavily shorting this company again hence creating a reversal in the recent uptrend.
Keep observing the monthly chart at the end of each month and once you have confidence that the uptrend is finally reaching exhaustion, you can pick up some in-the-money put options that expire in January 2023 like the one I posted below.
Stay patient, nimble and don’t forget to always plan your trades and trade your plans :)
