Michael Shulman

The Value of 99 Cents

by Michael Shulman   09/12/08

A 'DOLLAR' SHORT

The company is near the bottom rung of the retail ladder because, when consumers start scaling back on their discretionary spending, these types of stores are often the first to be abandoned as groceries and other needs must be met first. I knew that the economic slowdown meant that the 99 Cents Only Stores and retailers of that ilk would be doing anything but celebrating.

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 were forthcoming. Without paychecks, consumer spending at these stores tends to weaken, as people have to decide between paying the electric bill and spending money on "extras" at the dollar store.

99 Cents Only Stores' strong presence in the weakest homebuilding markets -- California, Texas, Arizona and Nevada -- was a sweet spot for us on the short side because of our other plays in ailing homebuilders. I expected the company to suffer greatly when more and more people stared missing mortgage payments and more housing-related layoffs came down the pike.

The best way to play this was buying the NDN February 35 Puts. We got in them in mid-October for 75 cents. For those of you playing at home, that equated to a mere $75 per put option contract (plus commission costs) to start. That's one of the many things I like about options, and puts in particular -- they generally require far less capital than buying a stock outright, and we put WAY less money at risk by buying puts instead of short-selling the stock itself.

Options often take less time to deliver profits, too. And this was especially true of our 99 Cents Only Stores play because, barely a month later on Nov. 12, we sold those February 35 Puts for $1.75, or a $133% profit.

But, just like my wife when she shops at the dollar stores, I said, "I'm not done yet." After selling our winning puts, I recommended my subscribers take their original investment dollars and "roll" into another put position in this name.