Let’s get this out of the way first: There is no compelling reason to own stock in Fitbit Inc (NYSE:FIT). For every product the company makes, there is a cheaper or better alternative, and Fitbit itself is burning through cash in an effort just to be relevant in the current market place. However, with earnings on the horizon, there may be a reason to bet short-term bullish on FIT stock.
If you want a good rundown of the woes Fitbit is facing, Laura Hoy recently did an excellent job comparing the company’s downfall to BlackBerry Ltd (NASDAQ:BBRY).
The gist of the situation is that Apple Inc (NASDAQ:AAPL) has already done to Fitbit what it did to Blackberry so long ago. It out innovated an existing product. The Apple Watch does everything a Fitbit can do and so much more … and it does so for not much more than the price of a top-of-the-line Fitbit.
As Laura puts it, a potential acquisition is the “only reason I’d expect a sane investor to add the company to their portfolio.” It’s a sentiment I’ve held personally for quite a while.
As regular readers know, however, I am pretty far from a buy-and-hold trader. And FIT offers up a potentially interesting, if a bit risky, trading opportunity heading into next week’s quarterly earnings report.
Click to Enlarge It all starts with FIT’s technical backdrop. The shares bottomed out at a fresh all-time low of $4.90 on June 23. Since then, FIT is up more than 10%, driven mostly by bargain hunters that still see some upside for the stock heading into the second half of the year.
Their reasoning isn’t far off the mark, as most consumer-oriented stocks head higher in anticipation of holiday season sales — FIT included.
For FIT, there is an added layer of pessimism that could provide a boost to those expectations. Remember, the underpinnings of contrarian investing revolve around a stock in a budding uptrend that is facing a wall of pessimism.
The idea being that all the negativity is already priced into FIT stock … all Fitbit has to do is offer up a bit of hope to shake out the weak hands and get bullish speculation rolling again.
And FIT has a wealth of bearish sentiment. For instance, Zacks reports that 12 of the 14 analysts following FIT stock rate the shares a “hold” or worse. Additionally, short interest now accounts for more than 25% of FIT’s total float as of the most recent reporting period.
The recent FIT bounce, however, might have spooked some FIT short sellers. Short interest actually declined 3% during the last reporting period, and call options activity is on the rise among short-term contracts — this is often a sign of hedging activity from short sellers worried about protecting their positions.
Currently, the July/August put/call open interest ratio rests at a rather bullish perch of 0.57, as calls nearly double puts among near-term options. The most shocking development, however, is that the weekly Aug 4 put/call OI ratio has plunged to a reading of 0.19. In short, calls outnumber puts by a factor of five-to-one among options most affected by next week’s earnings report.
That’s a lot of worried short sellers.
And they are worried that, with expectations in the gutter, Fitbit could spark at least a short-term rally with next week’s report. By the numbers, Wall Street is looking for Fitbit to post a loss of 15 cents per share on revenue of $341.13 million.
EarningsWhispers.com, meanwhile, puts the whisper number at a loss of just 14 cents per share. Hitting this whisper target could be enough to spark an unwinding of negativity and send FIT stock higher over the short term.
Furthermore, FIT stock has considerable volatility heading into earnings. Currently, Aug 4 implieds are pricing in a potential post-earnings move of more than 13%. That puts the upper bound at about $6.13, while the lower bound lies at near $4.70. Needless to say, a breakout above $6 could be huge for FIT stock, and scary for FIT bears.
2 Trades for FIT Stock
Call Spread: With Fitbit stock rebounding from all-time lows, and sentiment near a bearish extreme, the bar to beat next week is pretty low. All Fitbit has to do is not pull any surprise skeletons out of its closet, and the shares should rise — especially if they hit the whisper number or offer decent guidance.
Those traders looking to take a risk might want to consider an Aug $5.50/$6 bull call spread. At last check, this spread was offered at 15 cents, or $15 per pair of contracts. Breakeven lies at $5.65, while a maximum profit of 35 cents, or $35 per pair of contracts, is possible if FIT stock closes at or above $6 when August options expire.
Put Spread: For those traders who want to side with the FIT bears, an Aug $5/$5.50 bear put spread should fit the bill. At last check, this spread was offered at 18 cents, or $18 per pair of contracts. Breakeven lies at $5.32, while a maximum profit of 32 cents, or $32 per pair of contracts, is possible if Fitbit stock closes at or below $6 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.