This Apparel Retailer Is Best When It's Worn Down

Automaker BMW touts its vehicles as The Ultimate Driving Machines. I'm labeling Urban Outfitters as The Ultimate Trading Vehicle. Why do I say that? Take a glance at the data below. Since 2008, Urban saw six sell-offs averaging 55.9%. It then saw rebounds averaging 149.2% in holding periods that typically took just 13 months. If moves like that didn't equal opportunity, nothing does. Buying URBN after a major sell-off has been money for traders willing to go against the crowd. URBN's latest quarterly report was pretty much on target vs. analyst expectations. Fiscal third quarter earnings per share, or EPS, of 56-cents were actually one penny above Value Line's projection. Full fiscal 2019 estimates now center on $2.30 or so. While down from last year's record EPS of $2.72, that would still be URBN's second best year so far. Urban Outfitters hasn't been a good buy-and-hold stock. It now sells almost 36% cheaper than it did exactly nine years earlier. Buying on Wednesday gives shareholders much more value for much less money. That's a great metric if you are putting new money to work. Urban Outfitters has some very appealing attributes. It's totally debt-free. All its growth came from business gains, not financial engineering. It has no defined benefit pension to deal with. It carries no preferred shares. As of July 31, 2019, URBN held over $333 million in cash, about $3.39 per share. URBN has been solidly profitable year after year, even during the Great Recession years of 2008-2009. Its sterling balance sheet ensures it can function well in any environment. It also allows for strategic acquisitions if they present themselves. What is URBN really worth? From 2010 through 2018 URBN averaged a 19.3-times price-to-earnings, or P/E. From 2015 through 201, its multiple averaged 16.3-times. Assuming an even more conservative 15-times multiple on next year's EPS estimate of $2.55 supports a 15-month target price of $38.25. Hitting that very modest goal would provide a greater than 59% boost from the premarket trading price of $24.02 on Wednesday. URBN peaked above my $38.25 target price during each of the seven years 2010 to 2016 on well lower than current EPS. It hit $52.50 during 2018. URBN changed hands as high as $34.80 year-to-date in 2018. URBN is now offered at just 10.5x its FY 2019 estimate. It sells for an even more modest 9.4x next year's projected EPS. Both those valuations are among the very lowest in URBN's entire history. I've already documented how well URBN tended to rebound when it got even close to today's valuation levels. Value Line thinks URBN can be earning $4.50 per share no later than 2024. At a sustainable 15-times multiple that could lead to a doubling or tripling from today's very low price point. Option traders should be salivating at the premiums available on URBNs long-term options out to Jan. 21, 2022. Buying in-the-money calls with longer than two-year horizons could pay off very large if URBN recovers as I think it will. Maximum risk equals loss of 100% of the premium paid. Maximum profits are theoretically unlimited. My table reflects results (for call buyers) if URBN closes at $40 on expiration day Jan. 21, 2022 and options are still held long. A 60% move up in URBN would translate into option gains of either 107.5% or 119.3% respectively. Selling puts on URBN offers nice margins of safety. In the examples shown URBN could fall by from 15.4% to 34.3% from the trade inception price without causing losses. It's always nice to know you could be wrong and still make money. Maximum profit, on these or any other option sales, is always keeping 100% of the premium collected up front. Maximum risk is forced purchase of URBN shares at the net exercise prices shown above. Those prices would vary depending on the strike price of the put -- or puts -- sold. Future stock market action can never be guaranteed. That said, owning URBN at $20 or less would have been a winning position greater than 90% of the time dating back more than a full half-decade. Most of those five years saw URBN hovering between $25 and $45 per share. The latest sell-off in URBN appears unjustified. It's time to reposition in the stock to take advantage of its next great trading opportunity. Buy some shares with an eye toward selling at a 50% or better upturn. Consider speculating with some LEAP calls or puts. History says you'll be well rewarded. It's fun driving a BMW!

This Apparel Retailer Is Best When It's Worn Down

Since 2008, Urban Outfitters saw six big sell-offs and then big rebounds.

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