Stock Options To The Rescue! Pier 1 Imports (PIR)
Today we’re going to look at a stock replacement strategy on Pier 1 Imports (PIR). It allows you to lock in profits, reduce your risk, and gives you upside potential.
Here’s what happened…
Before the markets opened today, PIR reported quarterly revenue beat Wall Street estimates and earnings were in line with expectations. They also raised their full year profit forecast.
Shares of PIR jumped 3% from $19.55 to $20.26 as the stock began trading. But it has quickly given back those gains throughout the morning.
Here’s the deal…
The specialty retailer of imported decorative home furnishings reported quarterly sales increased 8% over the same quarter last year to $367.6 million. It beat analysts’ expectations of $367.2 million.
Earnings per share jumped 35% to $0.19 from $0.14 last year. It was in line with analysts’ expectations.
They also raised their full year 2013 earnings per share forecast to a range of $1.10 to $1.16. It was an increase from their prior forecast of between $1.08 and $1.14. But it still fell short of analysts’ expectations who were looking for $1.16.
Here’s the kicker…
PIR just completed their 12th consecutive quarter of same store sales growth. So, they’re obviously doing something right.
Unfortunately, past results don’t guarantee future success. Just because they’ve been growing sales for three years doesn’t mean it will continue.
In fact, growth is slowing. Last quarter, comparable store sales increased 6.7%. Last year sales increased 10.8% and over the last three years sales have grown at 28.7%.
Clearly, the trajectory of sales growth indicates a massive slowdown.
Management is hoping their new e-commerce website will offset the slowing growth at their stores. And it could. But it’s just too early to be sure their new strategy will work.
That’s a risky proposition for investors who are already sitting on some huge gains in the stock. PIR is up 41% so far this year. And it’s up 127% from the 52-week low.
Do you really want to let it ride on management’s hope that their new website will be the solution to their slowing growth?
Here’s what to do now…
At this point, PIR just made a new 52-week high. But it hasn’t been able to hold onto those gains today. So just about everyone should have some profits in this stock.
Instead of hoping for further upside in the stock, consider using options to replace your stock. It will allow you to lock in profits, reduce your risk, and you still get upside potential if the stock moves higher.
Let’s assume you bought 100 shares of PIR at $14 at the beginning of the year. At a recent price of $19.50, you’re sitting on a stellar 40% profit.
Selling PIR and buying the PIR December $20 call option for $1.45 is a great way to lock in profits, reduce your risk, and give you upside potential if PIR continues to move higher.
Right now you can sell your PIR stock for a $550 profit and it will cost you $145 to buy the PIR December $20 call option.
In essence, you’re locking in a profit of $405 on your initial $1,400 investment. That’s still a 29% gain on your investment. But since you own a call option, you still get to participate if PIR continues moving higher.
The December call option will take you through PIR’s next quarterly earnings. And everyone will find out if the new e-commerce website has revived their slowing growth.
If the website’s a success, the stock and your call option will soar. If it’s a failure, your call option will expire worthless. But either way, you’ll get to keep the $405 in profits you locked in today.
As you can see, replacing your PIR stock holdings with a call option allows you to lock in profits, reduce your risk, and still gives you upside if the stock continues to rally.
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Good Investing,
Corey Williams
Category: Stock Options To The Rescue!
