Rent-A-Loser and Win (RCII).

Because of the Pesach holiday, today’s trade will be abridged, direct and profitable in extremis.

So without any further Latinate suffixes…

Our attention devolves today upon Rent-a-Center Inc. (NASDAQ:RCII), the lease-to-own refrigerator hawkers from Plano, Texas.

RCII is, in fact, a great business.  But like many a great business, it was also subject to too much attention during the Batflu hysteria, and simply got overbought.

Fundamentals are reasonable (P/E is 15.87, P/B is 5.42 [e-GAD!], and Dividend Yield is 2.09%), but it’s in the technical realm where the excesses show up (see below).

RCII missed estimates, though its year ago fourth quarter numbers did improve.

The stock gained largely on the back of strong guidance from management, and a great deal of momentum from the current mania for growth stocks, all of which make investing in RCII an extremely risky proposition, in our view.

For that reason, we believe earnings revisions are on the way lower for the company, along with a general contraction of multiples as the overall market decline accelerates and expectations for equities return to more earthly levels.

Here’s the daily chart –

Technically, we have –

1. Two RSI overbought indications in the last quarter (in green), which
2. Have led to an RSI sub-waterline adventure over the last week (circled, in red) and
3. A MACD rollover – now declining toward its own, mid-way waterline.  Should she break below that level, there will be a great deal of technical selling.  We could see that occurring by weeks’ end.
4. In addition, the break below the lower edge of a five month trend channel (in black) likely signifies the first sign of a toppling that will bring the shares to roughly 45, where both the rising 137 day moving average (light blue) and a simple Fibonacci retracement calculation (purple) coincide.

In addition to the damage evident on the daily chart, both the weekly and monthly charts for RCII lend evidence to a secular top-out hypothesis.

On both (not shown here), RSI overbought reads of 80+ turn up in January of this year (weekly) and February/March (monthly).

And that’s a situation up with which we shall not put!

So we’re moving thus, Winston –

A Jew and His Money recommends you consider buying the RCII September 17^th 55 PUT for $6.30 and selling the RCII September 60 CALL for $5.70.  Total debit on the trade is $0.60.  Set a STOP buy on the shares at 65.

Rationale: we believe the structure of the trade is the best means of playing a coming decline in RCII.  With PUT spreads offering little in the way of profits and CALL spreads offering a negative return, it’s clear the market expects a tumble.

By splitting the strikes of our synthetic short in the above manner, we set our breakeven at $54.40 (current price on the stock is $57.44).

Maximum gain on the trade is unlimited.

Maximum loss – with proper STOPs in place – is $5.60 (difference between the short 60 CALL and the STOP buy at 65 plus the initial debit).

We will consider closing the trade at any point on the decline, as the PUT gains in value at the expense of the CALL.

Remember to maintain an open STOP order on the stock until the trade is closed.  That is, should the STOP buy be triggered, immediately reset a STOP sell on the shares at 65 in order to keep the trade square.  Should that STOP be triggered, reset a new STOP buy at the same 65 level.  Ad infinitum…

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew