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Tuesday, July 13, 2010

Skechers USA Inc. (SKX) Earnings Play

-Skechers (SKX) earnings announcement is expected on July 22, after market close. This high flying stock is down 20% from its June 21 intraday high of $44.90, while the S&P600 Small Cap Index is down only 5% for the same period.
- I could think of two reasons why SKX has shown relative weakness over the past few weeks. 1) Fund managers have been taking profits on high flying stocks and buying value stocks that have underperformed. Apple stock is the leading example of this, down over 10% since June 21, while SPY is down around 5%. 2) Investors are concerned about fundamentals of SKX and whether the momentum and buzz around "Shape-up" fitness shoes would disappoint expectations.
-Considering these two factors, technical analysis of SKX stock, and high implied volatility, I would recommend buying the Aug 35/30/25 butterfly for combined $1.20 or lower (this spread can be done at current bids/offers). This spread would make money if stock price falls to near $30 if fundamentals do not support a high stock price, but not lose much if stock price remains at current levels or rise slowly after earnings announcement.

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