Fashion Nice Gains From So-So Chico's

There are many ways to earn money in the market. One of the sweetest is by playing less-than-stellar companies when their stocks suggest good returns anyway. Specialty retailer Chico's FAS Inc. offers that kind of opportunity right now. Chico's came public during April 1993 at a split-adjusted price of 39 cents a share. Its post-2008 peak has been $20. The company's glory days seem long ago. It closed Monday, Sept. 24, at $8.33 on projected earnings of $0.63 per share for the fiscal year that ends Feb. 2, 2019. At the current quote Chico's has some appeal. The company is net debt-free. It has been profitable each year since 2009. Chico's 8.5-cent quarterly dividend translated into an alluring 4.07% yield at Monday's close. New distribution avenues such as QVC and Amazon.com have been phased in, as has the decision to use ShopRunner, a popular form of free shipping for well-qualified customers. Value Line's analyst thinks long-term results are likely to improve greatly, with EPS reaching $1.10 over the coming three to five years. Chico's typical price-to-earnings (P/E) multiple over the most recent eight years has run about 16.1x. A typical yield was around 2.12%. The stock's current P/E is well below average while CHS's yield is significantly above normal. All six of Chico's should have sold moments (red-starred below) occurred when CHS commanded above-average multiples. All but the year-to-date 2018 peak reflected subpar (for CHS) yields. A simple regression-to-the-mean valuation on next year's consensus earnings estimate supports an 18-month target price of about $10.60. That very modest goal is 27% above Monday price, and it's far from an upper limit. The shares peaked between $15.50 and $20.00 during each of the eight years from 2010 through 2017. Value Line expects CHS to get back to that range again, not later than 2023. Unless Chico's business deteriorates rather than improves, risk appears quite low while potential reward looks to be substantial. Option writers have some great ways to play CHS as well. They should consider selling some $7 or $10 strike price puts out to January 2020 or 2021. Worst-case forced purchase on the more conservative strike drops to either $5.50 or $6.00, depending on which expiration you chose. Margins of safety -- defined as the maximum percentage declines from the trade inception share price --were 34% and 28%, respectively, on the 2021 and 2020 puts based on Monday's price. What does mean to you as a put seller? Chico's could fall in a major way between now and the expiration dates while still allowing for profitability. With overall market action, a fall of 10% is considered a correction. A drop of 20% defines a bear market. Chico's dipping by either of those magnitudes still would leave option writers well in the black. Committing to own 1,000 shares of CHS at net costs of $5.50 or $6.00, if exercised, would have brought in from $1,000 to $1,500 in option premium when the shares fetched $8.33. Future stock market action never can be guaranteed. We can know for sure, however, that owning CHS at $6.00 or under would have been a winning position 100% of the time dating all the way back to before the start of 2010. In a cash-secured account, making $1,500 on $5,500 of your own money over 28 months would equate to earning 11.69% annualized; making $1,500 on the 20% maintenance margin requirement in a margin-type account would translate into 58.4% annualized. In reality, the return could be considered infinite if the option is held to expiration and ends up expiring worthless. You would have collected $1,500, never put out a penny and kept 100% of that money as profit. Chico's has disappointed in recent years but seems primed for better days ahead. Buy some shares, sell some puts or considering doing both. Due to space limitations I haven't gone into the potential benefits that could come from writing covered calls on stock held long.

Fashion Nice Gains From So-So Chico's

The less-than-stellar retailer still is doing well enough to present a great trading opportunity.

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