MorningWord 1/22/14: Put Me in $COH

by Dan January 22, 2014 9:20 am • Commentary

Just now, I was talking to a smart trader at a large institution on instant message as we do most mornings.  Part of most traders pre-open morning routine is to digest the news between the prior closing bell and the impending opening bell and attempt to identify some tidbit that sparks an idea for a new trade, usually a second derivative of the news that is already on the tape.  As I have stated in the past I am far from a Macro expert, but reading an article on the Bank of Japan’s commitment to continued easing (here) I learned that sales taxes are going from 5% to 8% in April in Japan.  While likely a fact known to many other market participants (please excuse my ignorance on the matter) it was news to me and I can’t help but think that U.S. multi-nationals that rely on Japan for a bulk of their sales could see some sort of impact in the second and third quarter.

The obvious conclusion would be consumer products companies like COH and TIF that got about 15% of their sales from Japan in 2013.  While both still perceived as luxury brands, COH has definitely fallen down a few pegs of late with high end consumers, evidenced by their horrible North American sales in Q4 reported this morning (here). Japanese sales are becoming a bigger piece of their pie by attrition.

COH shares are down 7.5% in the pre-market, almost completing the round trip from the Oct lows following their horrid Q3 results.  While the stock should find some support at the previous lows, the mid $40s could be in the offing.

The 2 year chart below shows the numerous gaps in the stock as the results from earnings and sales disappointments, with today marking the 5th lower, and just one evident in the entire period.  One thing is for certain, $50 should become meaningful technical resistance if the stock can’t get some footing and close above it today:

COH 2 year from Bloomberg
COH 2 year from Bloomberg

I would add that the 6 month chart is fascinating. The fact that some investors chose to puke the stock following the Q3 results and others stepped in and ripped the stock higher by almost  21% into the Holiday selling season from the Oct lows:

COH 6 month chart from Bloomberg
COH 6 month chart from Bloomberg

One last point. Despite all the current and potential headwinds in a market like Japan, the chart above suggests that a stock like this has the potential to act fairly irrationally, meaning that this is likely to be a horrible press on the short side right here, right now..  The trader that I was speaking to on the name also said that shareholder #6 on the holders list makes him nervous, I asked why I don’t know of them to be activists, he said nope, just really smart and very long term.

COH top shareholders from Bloomberg
COH top shareholders from Bloomberg

What I find most interesting that Lone Pine’s largest holding looking at a breakdown on Bloomberg is AMZN (as of Sept 30th), which by most accounts would be the farthest thing in retail from COH.