STOP! There’s 1226% on the Table; GO! The Grocer With Empty Shelves! (GO, COP)

There’s a profit avalanche a’rumbling…

And that’s why we’re coming at you early.

————————————–

Today’s business appears further below, but we’re leading with an open trade that’s fried and friendly and ready to eat.

So cue the energy sector –

It’s our COP trade, whose details can be found HERE.

In brief, we’re holding a debit of $5.26, a short COP July 15^th 115 CALL and a long COP July 15^th 92.50 PUT.

And…

The CALL can be left to wither.  With COP now trading at $84.64, we see little chance of a move higher of that magnitude (to 115) in the next nine days.

On the other hand, the PUT trades for $8.45.  Sell it and you exit with a stout $3.19 NET (on an initial outlay of just $0.26).

And that’s 1226%.

And now we push the cart to the checkout.

Grocery Outlet (NASDAQ:GO) touts itself as an “extreme value retailer of quality, name-brand consumables…”

And there’s no question its stock has destroyed its industry peers in the grocery aisle this year due to a unique sourcing and distribution strategy that kept her (mostly) clear of supply chain issues.

That said, all good things eventually go belly-up dead.

And we feel the time for GO to begin that process is about now.

For Several Reasons…

But mostly because an investment in GO shares now represents an extreme DEARTH of value.

Take a look at her fundamentals –

• GO trades with a trailing P/E of 77.94 (ridiculous, since we’re dealing with little more than a glorified IGA).
• Forward P/E is half that figure, coming in at just 37.94.  Or, if you prefer, analyst consensus is for the company to either DOUBLE its earnings or HALVE its stock price in the next twelve months.  We’re veering towards the latter.
• The stock offers no Dividend, and
• Trades with a belly-busting Price to Book ratio of 4.05.
• EPS declined this year by 42.20%, and
• The latest quarter numbers also disappointed – Q/Q Earnings were down 38.70%.  Yes, the company posted “beats” on both sales and earnings in its latest quarter report, but that was on the back of vastly diminished expectations.
• Finally, insiders have divested themselves of 50.96% of their holdings in the last half year, for a total of $27 million.  Of that total, $21 million were dumped in just the last 60 days.

Now the chart –

This is six months’ worth of trade in GO stock, and it shows –

1. A five month, juggernaut climb of 90% that culminated in a rising wedge pattern (in red)…
2. That cracked last week.  Rising wedges are bearish formations that trigger great selling once the lower trendline is sundered.
3. What’s more, the break occurred directly after a bearish engulfing pattern appeared at the top a week ago (in purple, enlarged).
4. Initial support is found at the rising short-term moving average at 40 (in brown),
5. But below that, a gap that requires filling to 32.50 beckons (in blue).
6. Both RSI and MACD are supportive of the bearish hypothesis, with the former diverging against price for three full months, while the latter is commencing its rollover now.

Our trade is looking to capitalize on all the foregoing.

Like this –

A Jew and His Gold recommends you consider selling the GO August 40/45 CALL spread* for a credit of $2.45 (4.80/2.35) and buying two (2) GO August 40/35 PUT spreads** for $1.35 (1.95/0.60) each.  Total debit on the trade is $0.25.

[*Sell the 40 CALL and buy the 45 CALL.  **Buy the 40 PUT and sell the 35 PUT.]

Rationale: the trade affords a maximum gain of $9.75 (twice the difference between the PUT strikes less the initial debit).

Max loss is $5.25. (difference between the CALL strikes plus the initial debit).

We’re of the opinion that because GO is a latecomer to the broad market selloff, her initial decline will be significant – a game of catch-up, as it were.  And it could well come soon.

If we’re a tad early initiating… patience… patience.

The Lord, G-d of Israel will prove Himself, here and everywhere else His beloved worshippers stand to glorify His great and mighty name.

.אין עוד מלבדו

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew