For as many years I have bought gift baskets for my friends, clients, other professional associates for Christmas. I realize that it is a little impersonal, but it’s at least a gesture to show that I appreciate everything they have done for me through the year. This year I made my purchases a little early to get a discount and get ahead of the rush. However, the mail-order gift business has been on my mind for a while as I have watched a large player in the business becoming much more dominant and innovative. The growth that 1-800-Flowers.Com Inc (NASDAQ:FLWS) has been experiencing (and should continue to experience) over the last two years is extraordinary.
Despite its excellent performance this year, we expect that FLWS is still a little undervalued and could have a big upside surprise in store after the fourth quarter holiday season.
FLWS is a mail/internet order service that made a name for itself delivering flower bouquets anywhere in the country. They have been doing that since the late 1980s and hit a lucky break in 1992 when AT&T (T) featured them in an ad during the Olympics. However, what many investors may not know is that FLWS has a much broader product range than flowers these days. Harry and David, The Popcorn Factory, and the Stockyards (mail-order steaks and chops) are just a sampling of the gift brands they own.
The growth of internet and mobile shopping has been good for FLWS. Shares are up several hundred percent since the recession and look likely to continue growing. However, it has one very significant weakness that may present an opportunity for flexible investors: FLWS is dependent on holiday weather. If a large percentage of your profits are made in the last two months of the year and February (Valentine’s Day), then everything has to work just right because you don’t get a second chance.
Unlike Alibaba (BABA), FLWS is probably not going to be able to invent brand new holidays out of thin-air (e.g. Nov. 11 Singles Day) and its dependence on the weather not interfering with holiday sales is an issue it cannot control. In 2014, winter storm “Pax” hit the East Coast from Feb. 11 through Feb. 17. The storm made deliveries more than a little difficult and FLWS suffered for it, including a 17% stock-price decline during the summer.
This year, the company has stretched to take on more than $143 million in debt to finance the purchase of Harry and David. That is a big project for a company with a post-acquisition valuation of $555million total. However, the company is expecting growth to accelerate 30% in 2015 as a result of the acquisition and organic growth in their other business lines.
So far, traders have been convinced. The stock rallied in September and almost doubled in price before pulling back a little this week. From a technical perspective, the stock broke through an ascending triangle but did not reach its normal price objective before pulling back to the breakout point – you can see that in the next chart. A retest of the breakout point like this isn’t unusual or even a bad sign, however, we think that some confirmation is needed before taking a long position in the stock.
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1800Flowers (FLWS): Chart courtesy of eSignal
Besides the fundamental growth potential, we like a long position in the stock for two reasons. First, it’s like a call option on fair weather. Expectations are a little dim because of the second appearance of the so-called “polar vortex” that is freezing the Midwest and Mountain states. That pessimism could be overbuilt into expectations and a break in the cold suddenly makes FLWS much more attractive.
Second, the breakout from its consolidation looks strong. It occurred on extraordinarily strong volume and despite the pullback, should have established a strong layer of support. Technically, this looks like a stock that is attracting buyers and could repeat its September-October rally as investors try to get in behind a strong holiday season.
Because the stock has been a little soft over the last few days, we do recommend triggering an entry order on a breakout beyond resistance. Right now, prices above $9.25 per share look good, but we could see some justification for an earlier entry if the stock bounced on the kind of volume we saw earlier this month on the break beyond $8.50 per share. A conditional order like this could result in some opportunity cost, but we think the additional confidence is worth it.
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.
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