Taipan Online: Hotline

We start with some great news for one of my own positions that I recommended to you just a few days ago. In fact, it’s time to take some profits, so listen up!

At around 10:45 last Wednesday morning, I sent you an alert, suggesting you pick up September 60 Calls in Abercrombie & Fitch (ANFIL.X).

In case you missed it, here’s a brief recap of why I pulled the trigger on that move.

Simply put, the stock endured an ugly selloff earlier last week, as investors bailed on…well, nothing at all! I received a few e-mails from folks who disagreed with my point-of-view, but I still believe it was one of the most ridiculous selloffs I’ve ever seen, based merely on the fact that the company missed its second quarter earnings estimate by six cents (six cents!) Profit still hit 63 cents-per-share, versus expectations that called for 69 cents-per-share – still pretty healthy. And the selloff came despite the company beating forecasts for the previous four quarters. The selloff was remarkable, considering the company reported this set of earnings:

Net sales soared 42% to US$571.6 million.

Of that, Abercrombie & Fitch net sales rose 22% to US$305.6 million
(same store increase of 26%); abercrombie net sales jumped 52% to
US$63.3 million (same store sales up 57%); Hollister net sales rocketed
up 82% to US$199.8 million (same store sales up 29%).

That produced a gross profit margin of 68.2% for the quarter and a
net income rise of 34% to US$57.4 million.

Net income per share swelled 43% to US$0.63.

Those results let the company to bump up its full-year earnings guidance
from a range between US$2.80 to US$3.00 to between US$3.10 and
US$3.30 on sales of US$2.7 billion.

The executives also decided to reward their shareholders by raising the quarterly dividend payment by 40% to 17 cents per share, payable on September 20 to shareholders on record as of August 30.

Shares slumped US$2.32, 3.6%, to US$61.23 on the day of the announcement and a further US$2.38 (3.9%) to US$58.85 the next day.

But the fact is, Abercrombie still turned a great profit and the foolish investors who blindly fled from the stock merely cleared the way for you to take some quick and easy profits.

As recently as July 7, the stock hit a new 52-week high of US$74.10 and has since been trading in the mid-US$60s. It was pretty clear to me that ANF would refill the big gap created and scoot back to US$60 and above, so I recommended buying the September 60 Calls (ANFIL.X) under US$1.40 per contract. These options were dirt-cheap, trading at around US$1.30 per contract because of the massive selloff.

Result? ANF did indeed scoot back to US$60, hitting an intraday high of US$60.20 on Friday. The Calls closed at US$2.30 – a profit of 77% in just two days. Nice!

While I think the stock is going higher still, definitely go ahead and snap up some profits now. Take half the position off the table for 77% gains. And feel free to write to me if you cashed in – I’d love to hear from you: mdenholm@taipangroup.com.

Oh, and by the way, if you’re still holding shares from my original recommendation on ANF back in the December 2003 Taipan issue (with an official entry price of US$28.83 on November 24, 2003), you’re still doing pretty darn well.

After a rough start, the stock soon picked up a remarkable head of steam, rumbling up to US$42.17 on November 4, 2004, at which point I put out a sell on half the position for a 46% gain. The second half is still going strong, with current gains of 105%, as the stock closed Friday at US$59.98. Keep holding.

This just in from my Red Zone colleague, Erin Beale:

STILL FLYING WITH LAN

Oil continues to hold the title as the number one market mover, and clearly this is not great news for the airlines. Many have announced hikes in passenger fares due to steep fuel costs. Just look at Delta (DAL:NYSE), whose share price has plummeted more than 65% since the beginning of July. Shares of Northwest (NWAC:NASDAQ) have lost about 36% of their value since June.

Sky-high oil prices have also impacted our position in Chilean Lan Airlines SA (LFL:NYSE). The company recently reported a 16% fall in quarterly profit thanks to fuel costs. But, due to several other positive factors, I’m recommending that you continue to hold the stock.

You can see the pressure that high fuel prices are exerting on LAN. While fuel caused profits to sink 16%, revenues actually clocked in 23% higher thanks to several new routes-within South America and beyond-and increased flights. July passenger traffic showed a 17% increase, while international traffic rose more than 20%. Lan just announced the purchase of 46 new aircraft, including 12 long-haul Boeing 767-300’s, over the next four years, which will double the freighter fleet and strengthen international passenger routes.

Additionally, Lan’s board just approved a dividend payout from 2005 profit totaling US$36.45 million, or US$0.1143 per share. Shareholders of record as of August 27 will receive the dividend on September 2. Watch for your dividend, and continue to hold LAN.

CLEARING UP THE BEST BUY CONFUSION

Finally this week, we cross over to WaveStrength’s Michael Wiles, who, following last week’s sell on your long-term Best Buy (BBY:NYSE) options, received a few questions and wants to clear up any confusion regarding the play. Michael says:

“As you might be aware, Best Buy’s stock underwent a 3-for-2 split on August 4. This split caused confusion on Best Buy’s options chain and from some subscribers explaining that after last week’s recommended sell, the split had altered their positions and that they therefore couldn’t heed our recommendation.

“Here’s the deal: According to The Options Clearing Corporation, this split forced many traders into adjusted positions, calculated by dividing the existing price by the split ratio, which would replace our position with the BBY Jan ‘06 36.6 Puts (BXJ MT).

“In short, if you found yourself no longer holding the BBY Jan ‘06 55 Puts (BBY MK) last Friday, you would have been unable to exercise our recommendation to sell. With that, I want to briefly discuss what remains ahead if you’re holding the adjusted play.

“Let me start by saying that this converted position is by no means a lost cause. Although some might assume that the upcoming winter holiday season might be Best Buy’s best friend, the company has a history of not weathering the season very well. In fact, Best Buy’s long-term chart shows a history of somewhat disappointing fall and winter months across the board.

“So yes, while the stock split did muddy the waters a little bit, our long-term puts still stand to gain in value as the stock declines over the next few months. Remain strong with best Buy and you’ll stand the best chance of turning a profit. At Friday’s close, the BXJ MT options traded for US$0.65 per contract, which is a pretty good deal.”

My thanks to Erin and Michael for their contributions this week. Enjoy the rest of the weekend and take care till next time.

Martin Denholm

Executive Editor, Taipan

MMM

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