Here's When Following the Leaders Can Pay Off

The people running the show are in the best position to know what their shares are truly worth. May and June of 2019 saw Capri Holdings CEO and CFO lay out over $20 million to own shares at an average cost of $32.61. The stock quickly rallied to $36.47 before tanking again, along with the broad market, in August 2019. On Aug. 15, CEO John Idol ponied up almost $10 million more to grab an additional 363,000 CPRI shares at about $27.48. After bottoming out at $25.25 the shares once again took off. By mid-November CPRI was back up to $40, a nice 58.4%, three-and-a-half month rise. Recent market action saw CPRI drift lower. Capri closed on Tuesday at $32.69. Is this a buying opportunity we should be taking advantage of? Let's review the facts. From 2012 through 2018 CPRI carried a typical price-to-earnings, or P/E, of about 17.1-times. All five of its previous best entry points (green-starred below) launched rallies from below normal multiples. Capri's three should have sold moments (red-starred) each reflected higher than normal valuations. Capri's Tuesday P/E represents the best bargain in the stock's entire history as a public company. Even a partial reversion-to-the-mean adjustment in mood could easily send the shares back to $65 or $70 by this time next year. That modest goal could produce a double from today's depressed quote. Reaching that is not far-fetched. CPRI topped out between $50 and $101 during each of the eight calendar years stretching from 2013 through 2019. EPS estimates for both fiscal 2020 and fiscal 2021 both call for all-time record profits. Research from Morningstar seconds my opinion. Morningstar assigns CPRI a 4-star, out of 5, buy rating. Morningstar deigns to provide 12-month targets, but do provide their view of present-day fair value for each stock they cover. For Capri Holdings that figure is $52, over 59% above its Tuesday closing price. Yahoo Finance notes Capri's optimistic earnings projections and super low P/E. Its 12-month goal sits at $45.67, more than 38% above its offer price. That target appears awfully conservative at just 9.4-times Yahoo's own fiscal 2020 estimate of $4.88. Buying shares outright, as company officers have been doing, looks good. Traders well-versed in options might be able to do much better via use of buy/write combinations. Actual prices for Capri's Jan. 21, 2022 expiration date options, when the shares were at $33.16, are shown below. Because I'm quite bullish on CPRI's prospects, my example will employ out-of-the-money $37.50 strike price calls and in-the-money $37.50 puts. Buy/write combinations involve purchase of shares while shorting covered calls and naked puts on the identical underlying stock. The table below shows the cash flow involved in a 100-share, one call and one put combination. In margin-type accounts money collected for the premiums sales of the call and put go towards paying for the stock purchased. That significantly reduces the out-of-pocket investment amount. If held through expiration day there are only two possible outcomes for the full buy/write combination. CPRI will close at either $37.50 or higher, or below $37.50. Reaching $37.50 or better requires a minimum 13.1% rise from the $33.16 trade inception price. Any close at that price or higher will create the best-case scenario detailed below. The leverage created via the buy/write process allowed for translation of that 13.1% move to a greater than 103% total return over just shy of two years. Outright buyers of CPRI at $33.16 would need to see $70.66 to make the same percentage gain. In my world 52% annualized is a very, very good return. There can be no guarantee that CPRI rises to at least $37.50 by expiration day. If not, the worst-case scenario described below would play out. That doesn't mean you won't do well, though. Break-even on the whole combination drops to just $27.98 per share. Any decline smaller than 15.6% from the trade inception price would still result in at least a small profit. The chart below illustrates how unlikely it is that you'd be hurt. Owning CPRI at $27.99 would have been a winning position about 98% of the time dating back all the way to very early days of 2012. Most of those eight years saw CPRI trend mainly between $40 and $80. Capri's CEO and CFO seem like wise investors. There's no reason not to join them in owning CPRI while the stock's valuation is as compelling as it is currently. Buy some shares, sell some puts or consider establishing a full buy/write combination.

Here's When Following the Leaders Can Pay Off

The CEO and CFO of this fashion stock are in the best position to know the company's value, so you should listen.

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