Why Kate Spade & Co (KATE) Stock Wooed Investors Wednesday

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Shares of Kate Spade & Co (NYSE:KATE) were strikingly hot Wednesday. But what can investors expect from KATE stock in the days and weeks ahead? Let’s take a look at what’s inside Kate Spade, both off and on chart, and in KATE’s options.

Why Kate Spade & Co (KATE) Stock Wooed Investors Wednesday

KATE was among the broader market’s most glitzy performers yesterday. As the SPDR S&P MidCap 400 ETF (NYSEARCA:MDY) showed the first real chink in its armor since the Presidential Election, shares of Kate Spade soared by more than 23% and making it the index’s top performer.

Behind the price surge in KATE, management at the handbag and accessory outfit announced it’s looking for a buyer of Kate Spade. Judging by the price chart of KATE, that’s hardly surprising.

Prior to Wednesday’s news-driven jump, shares were off more than 18% on the year. Now, KATE is only down a bit over 2% in 2016. That’s not exactly cause for celebration and popping the champagne for longer-term Kate Spade shareholders.

Management’s decision may make even greater sense given the company’s 10-year high set back in 2007 near $48 a share is still roughly 162% above Wednesday’s closing price of $17.86.

So, what is the right price for KATE stock? According to Wells Fargo, a branded acquisition like Kate Spade for interested suitors like VF Corp (NYSE:VFC) or PVH Corp (NYSE:PVH), Michael Kors (NASDAQ:KORS) or Coach Inc (NYSE:COH) could command a price of $23 a share.

The acquisition target price is backed by KATE’s still-growing market share and compelling valuation.

Wells Fargo’s price target for KATE also factors in recent and much-higher-priced industry buyouts of Tumi and Tory Burch. Both luggage company’s saw transaction multiples of 15x and 18x EBITDA respectively and compared to Wells Fargo’s 11x EBITDA and $23 a share target for Kate Spade.

KATE Weekly Price Chart

12-28-16-kate-weekly-chart
Source: Charts by TradingView

Looking at the provided weekly view of the past couple years for KATE and a good chunk of what was noted earlier and management’s motives for hoisting the “Buy me!!” signage are solidified.

Bottom line, Mr. Market has not been a friend of KATE’s since hitting an intermediate high of $42.87 back in the summer of 2014. Agreeably, Wednesday’s price action did confirm a double bottom pattern. However, I’m not holding my breath that a bullish trend is now underway.

Sensibly, I am not a fan of finding bottoms in situations involving buyout buzz and enthusiastic, reasonable-sounding analyst support aside. In fact, it’s our experience that the expression “there’s no free lunch on Wall Street” is elevated and worth appreciating.

KATE Stock Bullish Call Butterfly Spread

If one is inclined to accessorize the portfolio with some KATE, I’d use Wells Fargo’s price target of $23 or maybe up to $25 a share when looking at the options in Kate Spade.

The $25 price target lines up with a 38% retracement from the 2014 high and helps in designing a lower-cost, longer-term spread that can reasonably capitalize in a situation where KATE finds an actual suitor.

Reviewing the KATE options board and amidst the spirited call activity which trumped put volume by a wide margin, the April $21/$24/$27 long call butterfly is an interesting spread candidate. Pricing due to Wednesday’s price spike is slightly difficult to get a strong handle on, but for 30 cents or better, buying the spread is reasonable in our view.

Using April gives the trader some time to potentially see more information on a deal come to light. Also, as this KATE butterfly is centered at $24, the max profit of $2.70 should be in the ballpark if Wells Fargo is somewhat on the money.

The downside with a butterfly such as this is actually too much upside in shares of Kate Spade. Above $27, or 17% above Well’s target price of $23 in KATE stock, the spread would lose the full debit of 30 cents on an announced deal or at expiration — whichever might come sooner.

Nonetheless, given the healthy profit range from $21.30 to $26.70, the 30 cents at risk looks pretty good compared to the dollars which could be potentially lost from buying this handbag designer in the heat of the moment.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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