Add AZO Puts

Two Over-Valued Plays

By Bryan Bottarelli
Monday, June 30, 2008 3:06 PM EDT
Mon, 30 Jun 2008 19:06:00 GMT

PLAY: Buy the AZO July 120 Puts (AZO SD) at or under $3.00, good for the day. Place a protective stop limit at $1.70 and a pre-determined sniper sell at $3.80.

Dear Bottarelli Research Member,

I’d like to highlight two stocks that I consider grossly over-valued.

The first is Decker’s Outdoor (DECK – NASDAQ). They’re the makers of footwear with proprietary brand names like “Teva,” “UGG”, and “Simple.” As a point of reference, the “UGG” boots are what many Hollywood celebrities slip on while fetching their morning latte on Rodeo Drive. With shares of DECK currently trading at $140.00, I can’t help but think that a simple shift in fashion could doom the shares. Not only that, but it looks to me like $145.00 is the stock’s upside ceiling.

DECK

Don’t forget how quickly these brand-conscious stocks can fall. After all, remember what happened to a similar foot-wear maker Crocs (CROX – NASDAQ)?I remember making money playing call options on CROX with the $65.00 strike price. Now look at where it’s trading!

CROX

If the markets begin another downside push, put options on DECK could hand us a really nice downside profit. So stay tuned for this positive trade.

The other stock I consider over-valued is AutoZone (AZO – NYSE). The specialty retailer of automotive replacement parts and accessories operates 3,933 stores in the United States and Puerto Rico and another 123 stores in Mexico. Despite horrible market internals for the retail stocks, shares of AutoZone moved aggressively higher last week after its board approved a $500 million stock repurchase. And today, the stock is extending its upside thanks to BMO Capital Markets, who have apparently “upgraded” the stock by moving it from Under Perform to Market Perform. How this move translates into an “upgrade” I’m really not sure. But nevertheless, shares of AZO have moved from $110.00 to $122.50 over the last three days.

AZO

The bulls argue that new car purchasing is at historic lows (as seen by the stock performance of Ford and GM). Therefore, the demand for car parts to keep existing automobiles running will remain strong. On the surface, that makes sense. But ask yourself this: “Anyone who can’t afford a new car is pinching pennies anyway, so how much can they truly afford to spend on parts?” In my view, a new round of profit-taking is right around the corner. The recent upside move in AZO appears inflated and self-induced, and that never amounts to extended upside gains. The bulls are banking on a poor retailer consumer to continue holding up a stock in a weak automotive retail environment. I personally don’t think it’ll last. Therefore, let’s add puts on AZO now!

PLAY: Buy the AZO July 120 Puts (AZO SD) at or under $3.00, good for the day. Place a protective stop limit at $1.70 and a pre-determined sniper sell at $3.80.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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