Trade of the Day: Genesco (GCO)

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There has been a recent rash of blow offs among fast-growing or turnaround stocks in the apparel industry. A blow off can be described as a three-step technical signal that indicates a short term top. The first stage is a parabolic rise in price that can last from a few months to a few weeks. The stock then sees a significant spike in volume and a big decline. Blow offs are commonly triggered by news events like an earnings report. Genesco (GCO) recently formed a blow off that sent the stock back toward trendline support.

In this case, the trigger was a surprise announcement that margins over the last quarter had compressed more than investors had expected and the full-year outlook had to be adjusted. In the next chart you can see the three stages of a short-term blow off on Genesco in August and September.

Genesco 1
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Genesco (GCO): Chart Courtesy of eSignal

A blow off is usually a signal of weakness in a stock. However, it can also be overdone and the stock might just bounce right back. In this case, we think the former is more likely and Genesco is running into some snags that could lead to a support break in the near term. Even a small bounce higher may not negate the potential for a short-term decline if the stock pauses at the gap at $82.50 per share.

You may not have heard of Genesco but you probably know its brands: Dockers (licensed), Journeys, Johnston and Murphy, Lids, and others are staples of malls across North America. The company’s growth has been remarkable since the recession, returning more than 275% to investors over the past five years. However, returns have dramatically outpaced larger, more profitable peers in the sector as well.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.

New to options and need more personal guidance? Try our online options course: Strategic Investing and receive your first two weeks free by clicking here.

For example, operating margins for Genesco are less than half of those for the Gap (GPS), and yet GCO’s valuation multiples are 25% higher. GCO’s management has been making a strong case that what really matters is topline growth, which can go a long way until that starts to slow while the bottom line continues to lag.

This is the situation that Genesco is facing. This year’s growth rates are going to be slower than expected and margins are shrinking further. Unfortunately, the fundamentals are being compressed in its most profitable groups like Lids and Journeys, which means the stock is probably still over-valued despite the blow off relieving some pressure. We think that a decline toward industry-norms is likely. If the stock fell to $60-65 per share, its multiples (based on the last 12 months) would be more in line with its peer group.

However, this is a remarkably resilient market and buyers love to jump in at support. Genesco needs to break $76 per share before we would feel like the bearish case was justified for short-term entries. However, we would suggest keeping the stock in a bearish watchlist even if it bounces in the short term. If the trendline holds, GCO  may rise to the bottom of August’s gap and then move lower in a dead-cat bounce.

You can see an example of the two potential areas to initiate short positions in GCO at either around $77.87 and $76.00 in the next chart.

Genesco 2
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Chart courtesy of eSignal

Alternatively, some traders may want to pair this trade up with a long position in another stock in the sector. A pairs trade like that could be profitable whether the market rises or falls because an overvalued stock is likely to rise less in a bull market and fall more in a bear market, compared to a stronger peer.

John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.

New to options and need more personal guidance? Try our online options course: Strategic Investing and receive your first two weeks free by clicking here.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/trade-day-genesco-gco/.

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