Black Friday Is for Cowboy Traders

 | Nov 23, 2011 | 9:58 AM EST
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Often I have told clients, friends and college students that trading retail names on Black Friday is a sucker's game unless you are a CIA agent.

In order to generate intelligence on Black Friday a person must have an army of contacts nationwide from those on the ground in the store to the distribution channels to comrades in the world of investing (for me it's other analysts). If you are absent this arsenal from which to extract keen insights and opt to be a cowboy/cowgirl and trade Black Friday through images on television, Black Friday Google searches, or now pulling up #BlackFriday on Twitter, I hate to be the bearer of bad news, but losing more often than winning will result.

Why Black Friday Trading is Not for the Faint of Heart

  • Perception is not necessarily reality and the individual investor surely has greater access to perception than reality (cold hard facts).
  • Wall Street analysts tend to be very New York focused, since that's where their home bases are. Their notes that are distributed throughout the day, while helpful, may be removed from reality as well.
  • A true winning retailer on Black Friday is characterized by a pop in traffic as soon as the store opens, then the afternoon lull and then an evening intensification.  But minus any real contacts on the ground how could you possibly measure the traffic at a Gap at 5 a.m. and 2 p.m. at key malls across the country?  Honest answer, it's impossible.

To ultimately come out a winner use Black Friday as a litmus test for the rest of the holiday season and execute the trade in mind on Monday morning. For example, I made a great sell call on Bebe (BEBE) last holiday season after deciphering the traffic was poor on Black Friday and discounts ticked up on Saturday and I was able to still make that a win for clients by suggesting to short the stock on Cyber Monday. As a Thanksgiving educational gift and in effort to rub the crystal ball with success, I would say to spy outdoor products retailer Cabela's (CAB) as a short into next week. This particular call contains my view on the short-term macro backdrop (negative) and observations on the company.

Cabela's has one of the more creative Black Friday promotions around ($100 gift card or hoodie for first 800 people in line).  Yet, I think it's a function of being unable to get good, consistent traffic in its giant stores as management has made it a point to refrain from promotions. With promotions hot and heavy this holiday season, I don't believe Cabela's management is in the mindset to compete on price and if it's forced to do so, there is no guarantee comparable store sales will be energized.

Cabela's comps declined in the most recent quarter, not what I want to see when retailers broadly delivered upside to consensus forecasts and overall positive comps. In the scenario I have concocted, inventory becomes an issue as it pertains to fourth-quarter gross margins (was a tad too high for my liking exiting the recent quarter anyway).

There are other fundamental aspects that leave me unexcited on Cabela's, but I wanted to shed light on the trader's mindset since it's a short-term call.

Have a happy and healthy Thanksgiving!

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