Double or Nothing on this HanesBrands Trade

A year ago, I asked “Has HanesBrands Reached a Bottom?” At that time, the apparel manufacturer had fallen below $7 after trading above $21 eighteen months before.

The reason for the big share price collapse was indirectly due to the coronavirus pandemic. HanesBrands (NYSE: HBI) was struggling with global supply chain disruptions that decimated its sales.

I said then, “I’m usually not a fan of turnaround plays. However, I can’t help but wonder if now would be a good time to load up on Hanesbrands.”

At the end of that article, I recommended buying a call option on HBI. A call option increases in value when the price of the underlying security goes up.

Specifically, I advised: “Last week while HBI was trading near $6.50, the call option that expires in January 2024 at the $5.00 strike price could be bought for $2.00. For that trade to be profitable, HBI must appreciate by 8% within the next fourteen months.”

We didn’t have to wait nearly that long to make money on that trade. Less than three months later, HBI rose to $8.80.

That means there was $3.80 of intrinsic value in that option. Combined with the remaining time premium, this position could be closed out for a 100%+ profit at that time.

That’s the good news. The bads news is HBI plummeted below $6 a few days later after the company released its fiscal 2022 Q4 and full-year results (circled area in chart below).

Muted Environment

The problem was not the company’s fourth quarter performance. In fact, HanesBrands exceeded the high end of its guidance for net sales during the period.

At the same time, the company tamped down its guidance for 2023 based on “a muted consumer demand environment” and “first-half margin pressure as it sells through the remainder of its higher-cost inventory.”

In short, HanesBrands was sending a clear message to Wall Street. This year’s results would compare unfavorably to last year’s performance.

To its credit, HanesBrands outlook for this year has thus far proven true. During the second quarter, the company reported that it recorded “net sales, operating profit and EPS (earnings per share) from continuing operations within its guidance range.”

Read This Story: A Look at Q4 and What Lies Ahead for 2024

However, Wall Street doesn’t give bonus points to a company for correctly anticipating a downturn in its business. By the end of September, HBI was trading below $4.

Since then, it has bounced back above $4 but is still well below where it was trading a year ago. And with the company scheduled to release its fiscal 2023 Q3 earnings on November 9, I’m wondering if it’s time to buy another call option on HBI.

Certainly, nobody on Wall Street is expecting much in the way of good news out of the company. Over the past two weeks, trading volume in the stock has declined while its share price has gradually fallen.

At the same time, short interest in HanesBrands has risen above 15%. That means speculators are betting that the news will be bad and HBI will fall even further.

No Timetable

To be sure, the trade I am about to discuss is highly speculative. You can make a lot of money buying call options, as we did a year ago. But you can also lose it all if the stock does behave as expected.

A few days ago, the HanesBrands call option at the $4.00 strike price that expires on November 10 could be bought for 40 cents. For that trade to be profitable, HBI must rise above $4.40 by the end of next week.

This option expires the day after HanesBrands is scheduled to release its Q3 results. For that reason, it will be extremely volatile.

If HanesBrands surprises Wall Street with better results than expected, its share price could quickly rally up to $5.00. If that happens, the gain on this trade would be 150%. But if the company lays an egg that day, this option could expire worthless.

To be clear, I have no special insight into HanesBrands’ third quarter performance. What I do know is that one of its institutional investors is pressuring the company to restructure its business.

Six weeks ago, HanesBrands announced that it hired Goldman Sachs (NYSE: GS) to evaluate a possible sale of its Champion brand of apparel. However, it also noted that it “has not set a timetable for completion of this process and may suspend or terminated the review at any time.

I don’t know if HanesBrands will address that issue in the press release accompanying its quarterly results. But if there is any good news regarding that effort next week, we might just end up doubling our money again.

PS: Jim Pearce has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn the details about his next market-thumping moves? Click here now.

Subscribe to the Investing Daily video channel by clicking this icon: