Declining Dollar Tree Turns Giving Tree
by Michael Shulman 03/19/08
When the threat of a recession or an economic slowdown starts hanging over Wall Street, the "R" word gets bandied about, often with tales of investors cashing out and heading for the hills.
But instead of feeling powerless to whatever the economy is or isn't going to do, buying put options is a terrific way to recession-proof your portfolio and let you make quick profits when spending slows down.
When consumer spending starts grinding to a halt, one sector that gets sucker-punched is the deep-discount retail group. That's right, your favorite "dollar" store can face some serious trouble when its regular customers are scaling back on their spending.
To make matters worse for the low-end retailers, their customers' connection to the housing recession also serves to hit them where it hurts -- that is, their bottom line.
Many of the poor and working poor -- the deep discounters' target consumers -- are employed by construction and contracting jobs. And with homebuilding drying up and inventories ballooning, even more layoffs are forthcoming.
Without paychecks, consumer spending at these stores will weaken, as people will have to decide between paying the electric bill and discretionary shopping at the lower-end retail establishments.
In October, one name looked like it was going to suffer most when people started missing mortgage payments when the first wave of adjustable-rate mortgages started resetting. And in the coming weeks, we made some very nice returns off of an investment that cost as much as an item at one of these stores.
One of the chains most vulnerable to this development was Dollar Tree (DLTR), which operates more than 3,300 stores across the United States under various names -- Dollar Tree, Deal$, Dollar Bills and Dollar Express.
It had the most exposure to a general downturn and also had significant exposure in Sunbelt states and California, where homebuilding -- and workers in the industry -- had been hit particularly hard.
At the time, Dollar Tree was forecasting fourth-quarter earnings that would miss expectations, and the company anticipated that sales for stores open at least a year would be flat for the holiday quarter.
My research told me that their ho-hum outlook was generous, considering that the company had to pull 300,000 toys off of its shelves thanks to the fiasco over Chinese-made toys containing lead paint.
Back on Oct. 11, Dollar Tree shares hit a high of $42.75, but with a lousy holiday forecast looming, we got into the DLTR Feb 35 Puts when premiums were low and before Wall Street wised up and saw the slide coming, too.
Talk about a low-cost investment that was better than anything we could buy in the Dollar Tree -- we bought the puts for $1.05 on Oct. 11 and celebrated when we cashed them out on Oct. 22 for a 138% gain.
But Dollar Tree wasn't done giving yet.
To get even more profits from this falling stock, we "rolled" into a new position, the Feb 30 Puts, which we bought for $1.10 on the same day that we closed the Feb 35 Puts.
In options trading, "rolling" means replacing an existing options position with a new one that has a different strike price and/or expiration date.
Because the stock traded down to $36 and looked like it was going to keep on falling, we went with the puts at the $30 strike because the stock looked like it could break through that level during the life of our option trade.
Well, we rolled right into another pile of profits -- this time closing out the Feb 30 Puts on Nov. 12 for 190% returns as the stock dropped to $28.50.
The stock kept going down, but I was happy to bank the profits and head on to "greener" pastures. But you may be asking yourself, "But, Shulman, why didn't you wait until later to cash out for even more profit?"
It's easy to want to make more, more, more profits when you're on a "roll." But it's important to be careful not to get too greedy.
We had some nice profits and the time had come to bank them and use them for something nice to reward ourselves for making such a smart investment.
In fact, since we closed the trade for good, the stock actually traded up a few points, which could have erased a significant chunk of our gains. And we're in this game to make (and keep) money, not give it back!
In a volatile market where many stock investors are happy to have broken even, I wasn't going to gamble with hard-earned profits. I'm also not going to scoff at 138% and 190% gains, respectively, in less than a month's time.
Ultimately, we learned an important and very profitable lesson: It seems that money DOES grow on trees -- Dollar Trees!
by Michael Shulman 03/19/08
But instead of feeling powerless to whatever the economy is or isn't going to do, buying put options is a terrific way to recession-proof your portfolio and let you make quick profits when spending slows down.
When consumer spending starts grinding to a halt, one sector that gets sucker-punched is the deep-discount retail group. That's right, your favorite "dollar" store can face some serious trouble when its regular customers are scaling back on their spending.
To make matters worse for the low-end retailers, their customers' connection to the housing recession also serves to hit them where it hurts -- that is, their bottom line.
Many of the poor and working poor -- the deep discounters' target consumers -- are employed by construction and contracting jobs. And with homebuilding drying up and inventories ballooning, even more layoffs are forthcoming.
Without paychecks, consumer spending at these stores will weaken, as people will have to decide between paying the electric bill and discretionary shopping at the lower-end retail establishments.
In October, one name looked like it was going to suffer most when people started missing mortgage payments when the first wave of adjustable-rate mortgages started resetting. And in the coming weeks, we made some very nice returns off of an investment that cost as much as an item at one of these stores.
One of the chains most vulnerable to this development was Dollar Tree (DLTR), which operates more than 3,300 stores across the United States under various names -- Dollar Tree, Deal$, Dollar Bills and Dollar Express.
It had the most exposure to a general downturn and also had significant exposure in Sunbelt states and California, where homebuilding -- and workers in the industry -- had been hit particularly hard.
At the time, Dollar Tree was forecasting fourth-quarter earnings that would miss expectations, and the company anticipated that sales for stores open at least a year would be flat for the holiday quarter.
My research told me that their ho-hum outlook was generous, considering that the company had to pull 300,000 toys off of its shelves thanks to the fiasco over Chinese-made toys containing lead paint.
Back on Oct. 11, Dollar Tree shares hit a high of $42.75, but with a lousy holiday forecast looming, we got into the DLTR Feb 35 Puts when premiums were low and before Wall Street wised up and saw the slide coming, too.
Talk about a low-cost investment that was better than anything we could buy in the Dollar Tree -- we bought the puts for $1.05 on Oct. 11 and celebrated when we cashed them out on Oct. 22 for a 138% gain.
But Dollar Tree wasn't done giving yet.
To get even more profits from this falling stock, we "rolled" into a new position, the Feb 30 Puts, which we bought for $1.10 on the same day that we closed the Feb 35 Puts.
In options trading, "rolling" means replacing an existing options position with a new one that has a different strike price and/or expiration date.
Because the stock traded down to $36 and looked like it was going to keep on falling, we went with the puts at the $30 strike because the stock looked like it could break through that level during the life of our option trade.
Well, we rolled right into another pile of profits -- this time closing out the Feb 30 Puts on Nov. 12 for 190% returns as the stock dropped to $28.50.
The stock kept going down, but I was happy to bank the profits and head on to "greener" pastures. But you may be asking yourself, "But, Shulman, why didn't you wait until later to cash out for even more profit?"
It's easy to want to make more, more, more profits when you're on a "roll." But it's important to be careful not to get too greedy.
We had some nice profits and the time had come to bank them and use them for something nice to reward ourselves for making such a smart investment.
In fact, since we closed the trade for good, the stock actually traded up a few points, which could have erased a significant chunk of our gains. And we're in this game to make (and keep) money, not give it back!
In a volatile market where many stock investors are happy to have broken even, I wasn't going to gamble with hard-earned profits. I'm also not going to scoff at 138% and 190% gains, respectively, in less than a month's time.
Ultimately, we learned an important and very profitable lesson: It seems that money DOES grow on trees -- Dollar Trees!
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