Should You Short Christmas?
During the holiday season, people are typically looking forward spending time with friends and family, escaping the monotony of everyday life. Apart from spending personal time with each other, one of the biggest traditions across all holiday celebrations is giving gifts, which serve as simple reminders of care and appreciation. This season, however, it seems as if poor economic conditions may have adversely affected simple holiday traditions such as the gift of giving.
Recently, American Greetings Corp (NYSE: AM), which is a small-cap company that designs and distributes seasonal greeting cards, reported poor third quarter earnings. It reported an EPS of $0.50 versus analyst estimates averaging $0.81; revenues also came out to $463.6 million versus estimates of $439 million. In the end, the company also slashed 2012 guidance. As most would expect, why would the company lose money with holiday traffic looming?
There are two clear reasons for American Greetings' performance. First, consumers may have decided to not purchase greeting cards during the September-November timeframe. Perhaps it's a shift in general thinking, but it appears that people have been shopping for gifts at later dates this year. A few years ago, people would start buying cards and presents a couple months ahead of Christmas. This tradition may not be the case anymore. If this is the case, American Greetings' third quarter performance may be understated compared to historical performance. Consequently, its fourth quarter earnings would be impressive, assuming that cards are being purchased at the same rate as they have been in the past.
American Greetings could also be the victim of diminished demand. Given the uncertain economic situation, it is plausible that the American public is attempting to cut down on holiday spending. If so, greeting cards could very well be among the first items to be cut out from the average consumer's shopping sprees. If this case is true, then American Greetings could have a very rocky future ahead of it, at least until the economy gets better. However, with consumer discretionary items like greeting cards, the economy will have to fundamentally heal, not just the debt and equity markets. For example, unemployment will have to decline, the consumer price index will have to be positive, and GDP will have to increase, since it represents the strength and output of public and private sectors. Otherwise, citizens will simply not have the confidence nor the buying power to be able to fit in items such as greeting cards into their holiday spending limits.
To prove that American Greetings' overall performance is tied to the economy, one could look at its revenues and income since 2007. In 2007 and 2008, annual revenues were fairly constant. This make sense, as the American public did not realize just how poor the American economy was until late 2008. After that, however, revenues started to decline. It declined by almost $100 million in fiscal year 2009, by another $60 million in 2010, and a further $40 million in 2011. The company has managed to stay afloat and mostly preserve annual net income figures over the last five years, however, by cutting down on costs including sales, general, and administrative costs.
On a more positive note, the company is relatively cheap compared to other similar companies that are publicly traded. For example, its stock price is trading lower than other companies, as compared to earnings, book value, and sales. It has also retained positive operating and net margins over the last few years. In terms of growth metrics, the company has seen positive EPS growth over the last three years. Based on these financial metrics, some investors may consider investing in the company, given that they have a positive economic outlook going into 2012.
Investors have to think long and hard about the economy and its effect on the holiday season. It has become clear that consumer spending has taken a large hit since 2008, and it appears that certain discretionary items such as greeting cards may be suffering. However, this may present a good buying opportunity. If the global economy were to improve in the next year, now may be a time to enter a position in a company like American Greetings Corp.
Consumers have a few options when it comes to understanding the global economy. Consumer spending trends could help investors gauge where the global economy is heading into the future. Investors should also keep up with the news via Benzinga Pro to stay on top of major developments that move markets.
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Traders who believe that American Greetings will prevail in the future might want to consider the following trades:
- Long American Greetings by purchasing shares or call options. The firm currently appears to be close to a technical support level, so now may be a good time to buy.
- Short another similar company, like Hillenbrand (NYSE: HI). You could short this company to hedge a long AM trade or to accentuate your belief that American Greetings will dominate the seasonal consumer discretionary industry.
- Long an ETF like the Consumer Discretionary SPDR (NYSE: XLY). If a significant industry like seasonal products is doing well, consumer discretionary itself will probably do well.
Traders who believe that American Greetings will not succeed in the future may consider the following positions:
- Short American Greetings after it breaches the $13 level, which appears to be a technical support level. The next support level appears to be at about $11.
- Long a competitor like The Estee Lauder Company (NYSE: EL), as someone bearish on American Greetins may believe that a large-cap competitor is more likely to garner market share.
- Buy put options as American Greetings' earnings announcement comes along. The company may not be able to sustain its costs as precious metals rallied significantly in Q3 2011
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