L Brands Stock Has Been Gaining Value in Almost Stealth Mode - TheStreet

Remember L Brands (LB) - Get Report ? Yeah, those guys. The shares have given up roughly 60% over two years. Left for dead at the side of the road, these shares have been gaining value in almost stealth mode for most of October... and September. Is something going on here? On Wednesday, Moody's apparel analyst Michael Zuccaro mentioned his positive outlook for the U.S. apparel and footware industry. He cited "faster than anticipated revenue and profit growth." He did not mention apparel retailers, but Goldman Sachs mentioned this firm last week. Goldman initiated this name on Friday with a "Buy" rating and a $36 price target.

This name runs with an incredible 7.4% dividend yield. Is that sustainable? The balance sheet is awful. The debt-load simply dwarfs cash on hand, and makes up about two-thirds of market cap. Have you seen their earnings growth? Neither have they. The need is for some kind of restructuring that may or may not include a dividend cut. My gut instinct is that any positivity around this name would be in the expectation of progress being made in improving the firm's fundamentals.

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What I see is a name that grazed 61.8% Fibonacci resistance in Wednesday trade, that broke out of it's summer Pitchfork in early October. Is something afoot? It sure does look like at least some investors thinks so. For me, this may not meet my requirements for sound investment, but for a short-term trade, my standards are far lower.

The Risk

-Purchase 100 shares of LB at or close to the last sale of $32.42.

Risk Management

-Sale of one $37.50 December 21st call (last: $0.40)

-Purchase of one $30 December 21st put (last: $1.27)

-Sale of one $27.50 December 21st put (last: $0.66)

Note One: The aggregate layout for the options trades amounts to a $0.21 debit. By pushing out expiration well past earnings (scheduled for Nov. 21st), this set up allows for the shareholder of record (likely to be sometime in early December) to participate in any announced dividend. If that dividend is left unmolested, the trader will receive a payment of $0.60 per share, thus creating a net profit of $0.39 for all steps taken outside of the equity position itself.

Note Two: The trader has limited potential profit through December 21st to $5.47 (37.50- {32.49-0.39}=5.47). The trader may eventually have to double the equity stake by adding 100 shares at $27.50 upon expiration, creating a net basis of $29.77 (including that dividend payment).

(A longer version of this column appeared at 8:26 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts throughout the market day.)

At the time of publication, Stephen Guilfoyle had no position in the securities mentioned.