A note from the senior managing editor…
Below, you will find your October 2015 Sovereign Edge pick from Jeff Opdyke, the editor of Precision Profits.
Sr. Managing Editor, The Sovereign Society
Hopefully, you’re preparing for another blistering winter — particularly if you live in one of the vulnerable areas Chris Orr highlighted in last week’s winter forecast.
But even if you aren’t in a region that will be affected by the upcoming snowstorms, I still suggest taking a moment to read the report. It’s going to be the basis for most of the trades we have coming up this season.
If you read it, you know I already have one winter recommendation on my radar — and today I’m ready to execute it. Today’s trade is on a stock that has produced a strong, consistent winter uptrend since at least 2009, and this year should be no different.
The company is Columbia Sportswear (Nasdaq: COLM) — a winter weather clothier.
Every time we experience a strong winter, Columbia’s stock jumps by double-digit amounts, anywhere from 33% to 81%, as I’ll show you in a moment. Since this winter is shaping up to be just as severe as the past two winters (which produced stock gains of 46% and 81%), I expect this to be another strong year for Columbia Sportswear.
So here’s the trade to make:
Action to take: Set a Good ‘Til Canceled limit order to buy to open the COLM January 2016 $55 call option (COLM160115C00055000) at $4.15. At last glance, it was trading at $3.95. If your order is not filled by my next dispatch, I will update you on the trade.
As you can see in the chart below, Columbia Sportswear’s stock rallies throughout every tough winter:
This is an impressive trend. It’s not often you find a stock that delivers double-digit returns with such consistency. The only year there wasn’t a dramatic jump was during the mild winter of 2011 to 2012, when temperatures were warmer than normal across the country. What you should note, however, is that during that period Columbia shares did rally briefly, about $7. Given our strategy of selling half our position with a 100% gain, we would have easily locked in profits that year as well.
That shouldn’t be a problem this year, though.
In fact, here are some more details from Chris on how this extreme winter will affect Columbia:
As I wrote in last week’s winter outlook, this will be another chilly winter east of the Rockies. And across the Rockies there will be plenty of snow for skiers and snowboarders who need Columbia’s apparel.
West of the Rockies, El Niño will make this winter the coolest since 2013 to 2014 (one of the coldest winters in recent past). Shoppers tend to buy seasonal items based on recent memory, so combine that with a winter 4 to 7 degrees chillier than last year’s, and customers will be stocking up on coats, scarves, gloves and anything else that will keep them warm. Not to mention that children who last bought winter jackets in 2013 have now outgrown them and need new ones.
Columbia is also expanding its footprint in Europe, where the weather will be 2 to 5 degrees colder than normal — conditions that will be perfect for revenue growth.
Considering the outlook, I’m expecting Columbia’s stock to climb at least 25% this season. And since we’re buying calls, that stock jump will translate to significantly larger gains for us.
Columbia’s Earnings Say It All
When researching if this stock was fundamentally tied to winter weather, I didn’t only look at its historical charts. I also reviewed each of its quarterly conference calls over the past few years to get some more insight.
As you might have guessed, the company made the bulk of its revenue in its third and fourth quarters — essentially June through December. It makes sense since that’s the period most people begin buying warmer clothing in preparation for winter.
By purchasing our call options today, we’re positioning ourselves ahead of its third and fourth-quarter earnings, which are set for release at the end of October and in February, respectively. That means we’re in an ideal position to benefit from the investors who will start pouring into the stock.
So let’s get into this trade today — it’s a perfect example of the seasonal trends we’re always looking for in Precision Profits. And remember, trades based on extreme winters have a history of handing us strong gains. Last year, we closed winter trades for 145%, 100% and 105.7%, just to name a few — many of those in just a few months.
Well, that’s all for this week. But before I sign off, a quick note on the two options that expired worthless last Friday: the Briggs and Stratton October $20 puts, and the Carnival October $46 puts.
As I mentioned a few weeks ago, these trades headed away from us.
We made the Carnival trade to capitalize on the company’s weak seasonal pattern that bottoms in October, but a series of positive industry news capsized its typical movement. We’re looking to recoup that loss with the Carnival (NYSE: CCL) January $49 calls we bought earlier this month. Those will capture Carnival’s next strong trend, which sees shares rise into January.
Briggs and Stratton also moved against its typical downtrend after its fourth-quarter earnings topped expectations. The company saw an early start to its lawn-care season this spring, and it was a strong enough push to buck its historical pattern.
It’s unfortunate when temporary news sets a strong trend back, but I typically give our options enough time to see our theses play out. It’s why we’ve closed, on average, one triple-digit gain every month this year. So it’s important to remember that we more than offset our rare losses with hefty returns.
Until next time, good trading…
Editor, Precision Profits