New Trade July 10th, 2012 at 2:28pm: Enis and I had been looking for ways to press the luxury retail short without pressing some of the individual names. AXP trading at a market multiple, with only 5% expected earnings growth this year and a paltry 1.37% dividend seems like a decent way to play with the stock still up almost 24% ytd.
The nail in the coffin for me on this short came last week when a friend told me that if you called American Express and told them you wanted to cancel your Platinum card, or trade down to the crappy Gold Card that they would offer you a $400 “loyalty credit” to keep the shinier card. Fully expecting to move down to the Gold card, I made the call and sure enough, that is what they did, offered me $400 “loyalty credit”. Now I am not sure what the criteria is for the credit, but I can not imagine the company is doing this from a position of strength.
With earnings scheduled for July 17th after the market close, I want to make a near term bearish bet that some of the pain felt by the luxury retailers will be displayed in slowing activity among American Express card holders.
TRADE: AXP ($58.49) Bought the July 57.50 / 55 Put Spread for .45
- Bought 1 July 57.50 Put for .71
- Sold 1 July 55 Put at .26
Break-Even On July Expiration:
- Profits btwn 57.05 and 55, make up to 2.05, with max gain of 2.05 at 55 or lower.
- Losses of up to .45 btwn 57.05 and 57.50, with max loss of .45 at 57.50 or higher.
Original Post July 10th, 2012 from Enis:
International luxury demand is in danger.
We’ve touched on the theme of international weakness multiple times in the past 2 months. Dan has used IBM and NKE put spreads to play international demand weakness. More recently, he initiated the SBUX put spread partly due to their high expected international growth rates going forward.
We don’t like the looks of emerging market demand, especially high-end emerging market demand. Look at the price action in names like TIF (our post about it from May) or COH if you’re excited about luxury demand in emerging markets. My CotD post from 2 weeks ago highlighted the weakness of emerging market economic data.
As usual, this theme got me thinking about potential stocks that might be affected, but had not yet reacted. What about American Express? Sure, the name is about as American as you can get. And American Express has 65% of revenues from the U.S. But where’s the growth? As usual, not from the U.S.
So how has AXP performed vs. luxury retailers like COH and TIF in the past year?
Even COH, which is also gets about 2/3 of its revenues from the U.S., has shown significant weakness in the past 2 months. AXP is a picture of strength in the face of a weakening luxury retail market. Looks like it has some catching up to do.