Urban Outfitters (URBN) Rally Has Gone Too Far, Too Fast

The shopping preferences of the American consumer have been shifting for a number of years now. Online sales have been growing and sales at shopping malls have been on the decline.

Many traditional shopping malls have closed or they are struggling to bring people through the doors. This shift was going on well before the pandemic, but the global health crisis may have accelerated the demise of many shopping malls.

Retailers who maintain their stores in traditional malls have struggled to grow earnings and sales in recent years. One such retailer is Urban Outfitters (URBN).

Over the last three years the company’s revenue has only grown by 2% per year while earnings have declined. In the most recent quarterly report revenue was down 17% and earnings were down 43% compared to the second quarter of 2019.

Urban Outfitters’ management efficiency measurements are below average. The return on equity is 13.4% and the profit margin is only 6.7%.

When you combine the lack of earnings and revenue growth with the low ROE and profit margin, it shows that the overall fundamental picture for the company is bleak compared to other companies.

Resistance looming in the $25 area

Urban Outfitters has been trending lower for a couple of years now. The stock peaked at an all-time high of $52.50 back in August ’18 and in the March meltdown the stock dropped to a low of $12.28.

What concerns me is that the stock has rallied sharply off of that March low and more than doubled at its August high.

What jumped out at me on the chart was how the high from August connected with the highs from April and November of 2019. This downward sloped trend line is now just above the $25 level and will drop down to that level in the next week or two. Urban Outfitters is scheduled to report earnings on November 23.

Another thing that stands out is how the stock fell from November ’18 through March ’19 and again from November ’19 through March ’20. This could be pointing to a seasonal pattern in the stock.

The first decline saw the stock drop over 33% and the second one saw the stock fall over 60%. Yes the second one was probably made worse by the overall market meltdown, but it fell almost 24% in the week of November 18, 2019.

Based on the downward trend and the looming resistance, I like the idea of buying puts on Urban Outfitters. Given the two big declines I mentioned above, I like the idea of going out to the March 2021 options.

I think the 27-strike puts give investors the best risk-reward relationship. The March 27-strike puts are currently priced at $5.40, or $540 each. The stock is currently trading at $24.42.

If the stock does in fact peak in the $25 area and falls 33% again, this would take the stock down to $16.75. If the stock drops that low, the options will be worth $10.25 at the very least and that would mean a 90% gain for investors.

By going up to the $27 strike, it also allows some leeway for the stock to move above the $25 level without causing a big drop in the option price. Should the stock move above the $26.00 level, I would consider shutting the trade down.

Recommended Articles

Options: Why Buy Puts? To Make Money When You Think a Stock Will Fall in Price

Beginning options investors often struggle with the concept of put options. They have no trouble with call options. With calls, beginners usually grasp that you will buy a predetermined number

Bitcoin Zooming Higher Again. Speculation or the Future of Money?

As Bitcoin threatens to break through its record highs set a few years ago, at least some people are likely to get involved in speculating in them again. Many seem

5 Proven Ways to Earn Powerful Side Income

If you want to earn extra money with relative ease, whether it is to save up for retirement or prepare for a well-deserved vacation, one of the best things you

zto

Day Trading Now: Stock Too Expensive? Buy a Slice

The cost to build a diversified stock portfolio is often the highest barrier for new investors. The outlay required to buy a basket stocks is more than the dollars available.

Looking for Better Returns? 5 Ways to Invest in Brazil

Brazil is known for tourist attractions, its natural beauty and soccer. The former Portuguese colony is also a thriving multicultural country — a melting pot not unlike the United States.

Add Some Spice to Your Portfolio with This Consumer Staple Stock

When the vaccine results from Pfizer (PFE) were announced on November 9, it sent the stock market on a wild ride. Sectors that had been underperforming the overall market screamed

Iaccino: Market Volatility Here to Stay

Bob Iaccino, editor of the Stock Think Tank, talks about Amazon's move into prescription drugs and market volatility on Bloomberg News.

Beat the system by understanding both sides of the trade, reward and risk. Get Bob Iaccino's Stock Think Tank newsletter through this special offer.

Are Cannabis Stocks a Good Investment for 2021?

Cannabis and CBD oils are booming industries.  Economies see a massive boost of billions of dollars when these two hit the scene. From recreational to medicinal, these plants offer a

The Benefits and Pitfalls of Trading Options on ETFs

An exchange-traded fund (ETF) is a collection of assets that track specific investment categories. For instance, SPY tracks the S&P 500. ETFs can also track sectors and industries, such as

Options Strategy: Sell Covered Calls on Technology Stocks

Stock prices of publicly traded technology companies have been resilient this year. Many remained unaffected or benefited from the onset of the current crisis. Other sectors seem more exposed to

Looking for Foreign Stocks with Powerful Dividends? Look No More! (VYMI)

Declining yields on investment income products has let investors to hunt for high dividend yielding stocks to boost their income. One product that I have actively used and would like

Frazier: How I Got a 45.2% Gain in Less Than 60 Days

Click Here To Subscribe On A 100% Free-Trial Basis To The Bulletproof Wealth Report!

Hello David Frazier here, editor of the Bulletproof Wealth Report. I told subscribers to our Bulletproof Wealth Report on November 2nd that I expected U.S. stock prices