The Money Tree

Safely Generating Income in Retirement

New Position – KSS

Posted by mounddweller on January 12, 2013

Fellow Traders,

Friday, just before the market closed, I opened a new naked put trade.  I sold 3 FEB $40 puts on Kohl’s Corp (KSS) at $0.55.  With 32 days to expiration and 4.8% downside protection I am earning 1.375% ROIC or 15.7% annualized.

Kohl’s Corporation operates department stores in the United States. Its stores offer private, exclusive, and national branded apparel, footwear, and accessories for women, men, and children; soft home products, such as sheets and pillows; and housewares targeted to middle-income customers. As of September 26, 2012, it operated 1,146 stores in 49 states. The company also provides on-line shopping through its Website Kohls.com. Kohl’s Corporation was founded in 1962 and is headquartered in Menomonee Falls, Wisconsin.

For many years KSS was known as a high growth stock with a premium P/E ratio attached to it.  What once was a small, regional retailer has become a nationwide retailing powerhouse.  Last year Kohl’s generated almost $19B in revenue.  Certainly not Wal-Mart size but definitely not a mom and pop either.  Growing up in the heartland KSS has been very conservatively managed.  It generates strong operating margins, returns on assets and equity while maintaining a manageable debt load.  It’s net debt of $4B is easily financed by almost $1B in annual free cash flow.

A disappointing holiday shopping season has punished KSS.  In the past 3 months the stock has plunged 24% from a high just over $55 to a low of $41.35.  It now trades at < 10x earnings.

The 5-year chart and low valuation is what got me interested in initiating a trade in KSS.

BLOG - KSS 5 Year Chart

As you can see KSS has strong support at $40.  Other than the financial crisis in 2008, each time KSS has approached $40 it has bounced back.  I also looked at the 3 month chart.

BLOG - KSS 3 Month Chrt

In it you can see that after the lackluster Black Friday shopping results the stock was severely punished.  It fell hard and then continued to drift down further following along the lower Bollinger Band.  However, over the past couple of days it has pulled away from the lower Bollinger Band.  In my opinion this is a positive sign that may provide a good entry point for a naked put trade.

One last thought on why I decided to place this trade.  Kohl’s initiated paying a quarterly dividend a couple years ago.  It now pays a $0.32 quarterly dividend.  This dividend will likely be raised in March.  The stock now yields 3%.  If the timing of my trade is wrong and KSS resumes its fall and I ultimately decide to have the shares put to me I can take comfort in knowing that I will be paid to wait for its eventual recovery.

Regards,

Troy

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One Response to “New Position – KSS”

  1. […] New Position – KSS […]

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