On Friday, the Bureau of Labor Statistics reported that the Consumer Price Index (CPI) showed a year-over-year increase of 8.6% in May 2022. That’s the highest inflation print since 1981, as Americans contend with a surge in gas, food, and shelter costs.
According to estimates compiled by Bloomberg, economists were expecting an 8.3% increase in May, so it’s no surprise stocks opened lower in Friday’s trading – including one-time Millennial darling Robinhood Markets, Inc.
At this point, the Federal Reserve has little choice regarding its interest rate policy. It has to continue raising rates, which will continue to put pressure on stocks – especially consumer discretionary stocks that sell goods or provide services that people can actually live without.
That’s where I want to focus today. If we play our hands right, we could walk away with 100% gains off the two new trades I’m watching today, so…
Betting Against Luxury
First up, Stitch Fix, Inc. (SFIX), the San Francisco-based online retailer that pairs consumers with stylists who curate boxes of clothes shipped directly to your door.
In theory, I like the idea.
In practice though, the company basically has no barrier to entry from competitors, it provides a service that isn’t really a necessity, and when push comes to shove, consumers who are feeling the pinch of higher energy, food, and housing prices are likely to just cancel their membership to save some money.
That’s exactly what we saw in the company’s recent earnings report.
On Thursday, the company reported third-quarter results of fiscal 2022 that showed revenue dropped 8% year-over-year to $492.9 million, and its active client count dropped by 5% (or 200,000 users) to 3.91 million.
For the quarter, the company’s net loss soared compared to the same period in fiscal 2021, to a loss of $78 million, or 72 cents a share, versus $18.8 million, or 18 cents a share, during the same period in 2021.
Additionally, the company has revealed plans to shave off 15%, or roughly 330 of its salaried employees.
None of those numbers sound good, so it’s no surprise the stock was down more than 19% in early Friday trading.
I don’t see anything on the horizon that will magically turn around SFIX, but I also don’t want to overpay for put options.
If shares of SFIX trade back up to $7.00 by June 17, 2022, I like buying the SFIX September 16, 2022 $7.50/$5 Put Spread for $1.20 or less. Plan on exiting the SFIX September 16, 2022 $7.50/$5 Put Spread for a 100% profit or if shares of SFIX close above $8.00.
I’m also watching Robinhood Markets, Inc. (HOOD), the investing platform popular with Gen Z and Millennial investors.
In 2020, when Americans were flush with COVID-19 stimulus checks and nothing to do, a lot of new investors flocked to Robinhood’s platform to take a shot at being first time investors, or even day traders. That translated into a huge revenue jump for HOOD.
In 2019, the company reported revenue of $277.53 million.
By the end of 2020, that number had jumped 245% to $958.8 million.
And by the end of 2021, revenue had jumped another 90% to $1.82 billion.
That’s great top-line growth – but even with all that revenue growth, the company saw a diluted net income crater from a $106.6 million loss in 2019, to a $200.15 million loss in 2020, to a massive $3.69 billion in 2021.
Investors who made easy money on the way up off the COVID-19 bottom are now facing a rising rate environment. That’s hard on stocks, especially the kind of tech and meme stocks that worked so well on the way up.
Many of those new investors have never faced a rising rate environment, and as losses mount in their accounts, they’re likely to stop trading as much.
That’s bad for HOOD’s top line, and we’re already seeing it show up in the company’s numbers.
Revenue over the last 12 months has dropped to $1.59 billion.
I expect it will go lower as younger investors face inflation and have less expendable cash to invest or trade.
At this point, I like buying the HOOD August 19, 2022 $7/$6 Put Spread for $0.40 or less. Plan on exiting the HOOD August 19, 2022 $7/$6 Put Spread for a 100% profit or if shares of HOOD close above $8.50.
Cheers,
— Shah
Source: Total Wealth