Wednesday, November 25, 2009

Establish Aeropostale Inc. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of Aeropostale Inc. (ARO) covered calls as follows:

Established Aeropostale Inc. (ARO) Covered Calls for Dec09:
11/25/09 Bought 300 ARO @ $30.56
11/25/09 Sold 3 ARO Dec09 $31.00 Calls @ $1.30

Aeropostale, Inc. operates as a mall-based specialty retailer offering proprietary branded, value-priced, active-oriented casual apparel and accessories. Their market is primarily teens between 14 and 17 years old. The company offers a collection of apparel, including graphic t-shirts, tops, bottoms, sweaters, jeans, and outerwear; and various accessories including sunglasses, belts, socks, and hats under AEROPOSTALE, AERO, 87, and other related trademarks. It has a very strong competitor in Gap Inc. and to a lesser extent the higher-end teen mall retailers of American Eagle Outfitters and Abercrombie & Fitch. Nevertheless, Standard & Poor's calls Aeropostale "the best performing teen apparel retailer in the mall." Aeropostale operates a total of over 900 stores located almost exclusively in the U.S.

Aeropostale provides both good growth and value characteristics; this year it is continuing its perennial store-for-store sales growth and this has afforded management the opportunity to be selectively less aggressive with promotional markdowns. As a result, merchandise gross margins are likely to increase this year by more than 3.0 percentage points. This, in combination with management's continuing excellent expense controls are resulting in outstanding profitability (measured by return on invested capital) results. Yet at its current price, it is also a compelling value investment since its P/E ratio is below 10.0 based on its expected current year earnings of $3.20 per share. Third quarter earnings will be announced on Dec 2nd, but these results are well known since the company has already announced its sales results and has a tight window of $.90-$.91 for quarterly earnings. The more important announcement that day will be ARO's November sales results; this advisor believes this could be a positive catalyst for the stock price since this year will be compared with the relatively depressed sales levels during last year's credit crisis.

The 'Buy Alerts' spreadsheet below shows that ARO has a 'Total Points' rating of 21.49 which exceeds the Covered Calls Advisor's desired threshold of 20.0 points.

Note: For expanded view, left click on the spreadsheet above.

Some possible overall performance results(including commissions) for the ARO transactions would be as follows:
Stock Purchase Cost: $9,176.95
= ($30.56*300+$8.95 commission)

Net Profit:
(a) Options Income: +$378.80
= (300*$1.30 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $30.56):
-$8.95 = ($30.56-$30.56)*300 - $8.95 commissions
(c) Capital Appreciation (If exercised at $31.00): +$123.05
= ($31.00-$30.56)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $30.56): +$369.85
= (+$378.80 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $31.00): +$501.85
= (+$378.80 +$0.00 +$123.05)

Absolute Return if Unchanged at $30.56: +4.1%
= +$369.85/$9,176.95
Annualized Return If Unchanged (ARIU) +62.8%
= (+$132.85/$9,176.95)*(365/24 days)

Absolute Return if Exercised at $46.00: +5.5%
= +$501.85/$9,176.95
Annualized Return If Exercised (ARIE) +83.2%
= (+$144.85/$9,176.95)*(365/24 days)