Stitch Fix (NASDAQ:SFIX) reported earnings last night and, after the initial knee-jerk spike, investors sold it down 30%-plus. SFIX delivered a decent report beating fourth-quarter expectations, but Wall Street hated the comments from management. Luckily for bulls, SFIX stock came into the earnings event up 80% year-to-date. This was even more of a gain than the almighty Amazon (NASDAQ:AMZN) could muster. SFIX had a significant spike in August and this dip brings it back into that neckline. Therein lies the opportunity.
Yes, the bulls lost the first level of support at $39 per share but there should be another one just below it. Around $35 per share, this is a mid-term pivot point where the bulls and the bears will want to fight over it. This usually creates congestion on the way down, which is a fancy word for support.
The only caveat is that management did not seriously present evidence that their thesis has materially changed for the rest of the year. SFIX handily clobbered the net non-GAAP losses in net income and profits, even managing to eke out a net top-line gain. Nevertheless, investors hated the message.
It was the same story: They beat the expectations for the quarter at hand but guided below expectations for the coming quarter. In 2018, this is a cardinal sin that Wall Street won’t forgive.
This, to me, is a buy on the dip. My thesis is that there is an opportunity in the fact that Stitch Fix management only guided lower in the first quarter of 2019. They did keep the 2019 guide about where expectations were before this report. So if anything, they are conveying a message that they are merely worried about the current environment most likely from the ongoing tariff tiff. This is understandable and indicates that this is a young management team that is mature enough to portray realistic expectations.
Fundamentally, SFIX stock is not cheap but this is a growth story, so I don’t worry about that for now. Young companies need to spend money to grow their business. I do like the concept of Stitch Fix and I think it has legs. Sure, it’s strange at first, but it makes sense for many generations of people. There is a good chance that the Stitch Fix model will appeal to major retailers and one of them may snap up SFIX stock for a premium.
But this is not my thesis.
SFIX Stock Options
The Bet: Sell SFIX Dec $22 put. This is a bullish trade for which I collect $1 to open. I have an 80% certitude that I will retain maximum gains. But if price falls below my strike then I own shares. I would then need to manage off of my breakeven point of $21. Selling naked puts carries big risk especially for a stock as frothy as SFIX. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the SFIX Dec $22/$20 bull put spread, which has about the same odds of winning and would yield 15% on risk. Compare this with risking $34 per share here and without any room for error expect a rally profit.
It is important to note that today’s trade doesn’t need a rally to profit. I simply need support for SFIX stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor. But just in case, I have to be ready to own the shares at that level.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
