Here's a Stock That's Got Some Sole

This year has been a disaster for retailers due to forced shutdowns. Much of that damage appears behind us now as things are gradually improving. When evaluating this industry group you need to ignore the hideous results from fiscal 2020 and look ahead to next year and beyond. Genesco provides a prime example of the opportunities available for those with vision and reasonable time horizons. I wrote about GCO back in April when the stock fetched $15.77. As of Tuesday, it closed at $19.19, up 21.7% since that article was published. Based on all available data, GCO still has tons of room to run. From fiscal 2010 through fiscal 2019, GCO's average price-to-earnings ran about 13-times. The shares peaked between $48 and $89 year-after-year on EPS, which fluctuated from $3.13 to $5.16. Fiscal 2021 is now expected to show EPS of $3.85. A simple regression-to-the-mean valuation on that number supports an 18-month target price north of $50. Longer-term results figure to get better. Value sees EPS growing to $6.50 not later than 2025, leading to a three to five year share price range for GCO of from $70 to $100. Yahoo Finance is also bullish on Genesco. While less enthusiastic than I am, it sees $31 for the stock by this time next year. That's better than 61% upside over the coming 12-months. Note, too, that GCO changed hands as high as $48.46 last January and was over $28 as recently as June 8. Independent research house Morningstar sees GCO's present day fair value as $36.97. Simply getting to that price again would deliver over 92% from its Tuesday's quote. Clearly, GCO offers outstanding upside potential for those willing to own the shares and give things time to get back toward normal. Option players have multiple ways to participate in GCO's future rebound. Selling March 19, 2021 $20, $22.50 or $25 puts drops the if exercised prices way below where it trades today. Setting up a somewhat aggressive, $25 strike price March 2021 buy/write combination might deliver huge profits. Using the proceeds from both the call and put options to help pay for the stock purchased drops the out-of-pocket outlay to just $659 per 100-share commitment. That provides substantial leverage if GCO rises to $25 or better by expiration day. If all positions in the buy/write are held through March 19, 2021 there are just two possible outcomes. GCO will either close at $25, or higher, or below $25. In the former situation the following best-case scenario would play out. The $1,841 profit on each 100-shares translates to a stunning 279.3% cash-on-cash return on just a 30.3% move up in the underlying shares. That rate annualizes at over 465% as it only required a 0.6-year holding period. If GCO fails to rise to, and hold that $25 strike price on Mar. 19, 2021 the worst-case scenario detailed below would unfold. Barring a major, and unexpected collapse, though, even that outcome does not appear scary. You'd end up with a double-sized position and have needed to pony up some additional cash. The break-even point on the whole combination would drop to just $15.80 per share, though, allowing for almost an 18% margin of safety. Any drop of less than $3.39 per share would still allow for immediate liquidation of the position with at least a small profit. Future stock market action can never be guaranteed. We can see from the 10-year chart below, however, that owning GCO for under $16 would have been a winning position for all but two of the prior 120 months (greater than 98% of the time). Genesco sports a solid balance sheet while enticing me with extraordinary upside potential. Buy some shares, sell some puts, or consider setting up buy/write combinations using whatever strike price suits your purposes best. However you choose to play, the odds appear stacked in your favor.

Here's a Stock That's Got Some Sole

Footwear name Genesco sports a solid balance sheet and entices with extraordinary upside potential. So step on it.

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