I Went to Jared, I'm Glad I Did

Last spring, in the midst of the COVID shutdowns, shares of Signet Jewelers fell briefly into single-digit territory from a 2015 all-time high of $152.30. Nobody was sure how long the mandated store closures would remain in effect, but everybody should have known that they would eventually be lifted. SIG is the leading seller of diamond jewelry in each of its major markets. It owns a number of different brands serving specialized market segments. The company has 2,800 stories under the names of Jared, Kay Jewelers, Zales, H. Samuel, Ernest Jones, People, Piercing Pagoda and JamesAllen.com. Signet had some problems previous to COVID and was well on its way to solving them. From fiscal 2012 through 2017 business was booming. (Fiscal years end on the Saturday closest to Jan. 31 of the following year). Over those six years SIG showed average earnings power of $5.89 and typically carried about a 14.6-times multiple. Getting back to that level of earnings and a more typical price-to-earnings suggested that SIG could eventually rebound to at least $86. I was brave/lucky enough to pick up some shares during the crunch time at extraordinary prices. Later on I added more in the $21 - $24 range. I also sold a lot of puts at strike prices ranging from $10 - $30. Looking back, I wish I'd bought much, much more than I did. As of Friday, I'm sitting on paper gains of over $104,000 on a less than $30,000 net investment. All my put sales ended up expiring worthless, the best-case result for options sellers. Those profits are in addition to the ones detailed below on the actual long positions. Amazingly, those who bought SIG around $8 can now collect out-of-the-money covered call premiums that are way higher than what they actually paid for the shares themselves. Jan. 21, 2022 calls at $70 were fetching about $13.60 last Friday. The $80 strike price, 9-month calls were bringing in $10.70. $90 calls for next January attracted $9.30 per share. Investors willing to hold through Jan. 20, 2023 could pocket more than double their original cost by writing $65 to $80 calls. Imagine getting twice what you paid back right now and still having the chance to sell at up to net prices running from $86.80 to as high as $97.20. Why has Signet rebounded so strongly? Fundamentals keep exceeding expectations. Last week's fiscal Q4 report came in way above estimates and management's comments were quite bullish. Signet is up almost 600% in exactly one year. Even so, a move to $86 would provide a further 40.7% increase from $61.10, the stock's Friday price. That goal is far from an upper limit. The chart below show's 2015's $152.30 peak, 2016's high of $135.60 and 2017 top at $96.40. Most of you likely missed out on getting SIG at rock bottom prices. It's not too late to make stellar gains on the stock even now. How can that be done? Consider setting up $60 or $65 Jan. 20, 2023 buy/write combinations. Doing that involves owning at least 100 shares of SIG while selling covered call(s) and naked put(s) on the stock. Here were the actual prices on those options with SIG at $61.10. The $60 strike price buy/write is very conservative as achieving the best-case scenario does not even require the stock to move up from its trade inception price. When executed in a margin account with excess free buying power the net outlay for each 100-share, one call and one put combination drops to just $1,570. If SIG merely holds at $60 or better on expiration day the following best-case scenario will unfold. Traders would pocket over 282% net gains or 153.2% annualized returns on a stock that goes sideways, up or down no more than $1.10 per share over the next 672 days. What if SIG fails to do that? If so, the worst-case scenario detailed next would apply. Barring a major decline, though, even that event would likely still provide a decent gain. Any drop of less than 38% would allow for immediate liquidation without a loss. Fans of SIG, who expect it to go up could go with $65 strike price options rather than $60s. Getting best-case results would need Signet to rise by at least 6.4% from $61.10 to collect the maximum benefit. That number rises to 314% in total or 170.5% annualized if SIG just climbs to $65 or better. If SIG closes below $65 the combination's margin of safety still would protect you against a loss of up to 33.9%. Here's a quick cheat sheet comparing the two different strike prices to see the increased upside, but reduced margin of safety, on the more aggressive $65 variety. In both cases, potential gains run quite high and the chance for losses appears low. There you have it. The lessons learned should be obvious. Buying decent companies when fear is rampant almost always pays off hugely for those willing to accumulate when others are busy dumping. Few traders are lucky enough to catch exact bottoms. Don't be hesitant to average down, or up, on a stock you like. The shares I bought in the low $20s were way more expensive than my best buys on SIG. I'm more than happy that I plunged in for more on the way back up. Selling options on stocks you favor can greatly enhance total returns and help mitigate risk. Money collected from covered call writing removes that amount of downside risk. Selling puts provides an immediate margin of safety compared with outright purchase of the same underlying shares. Selling both calls and puts on stocks you own (buy/write combinations) can turn modest stock movements into tremendously profitable trades.

I Went to Jared, I'm Glad I Did

Let's look at the 'golden rules' of investing from Signet Jewelers, which operates Jared, Kay Jewelers and a number of others.

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