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Strategies & Market Trends : Z Best Place to Talk Stocks -- Ignore unavailable to you. Want to Upgrade?

To: Larry S. who wrote (49074)	8/21/2003 10:01:56 AM
From: DanZ	Read Replies (1) \| Respond to of 53068

TOY. I have traded this stock long and short, currently short, and here's why. Fundamentals: The stock is trading at about 12 times this year's estimate and 11 times next year's estimate with 9% expected growth. That doesn't make the stock tremendously overvalued, but it definitely isn't cheap. The company's toy stores are having trouble against the likes of discount retailers such as Walmart and Target. Their only bright spot is Babies-R-Us, but that division is too small to make up for losses at Toys-R-Us and Kids-R-Us. TOY's gross margins are under pressure, and they aren't making up for it in more volume. It seems to me that they are between a rock and a hard place. If they lower prices to try to compete based on price, they lower their gross margin even more and may not make up for it in volume. At least that hasn't worked for them in the past. If they keep their prices where they are, gross margins won't improve. If they raise prices, their margin might go up, but their volumes will likely go down even more and they will lose more money. They really need to lower their operating costs and get their revenue per employee up, which is way below the average for specialty retailers. TOY's gross margin compares favorably with WMT, but WMT turns their inventory over more than twice as fast as TOY. This would seem to indicate that TOY can not compete based on price with WMT. Technicals: The stock has broken out on the daily chart, as has the Retail Index ($RLX). However, TOY has resistance on the weekly chart at about 13.50 and on the monthly chart at about 13.15. The stock is also overbought on the daily chart (RSI and Stochastics). At the moment, I think that the stock is just riding the market momentum, and particularly the strength in the $RLX. The stock is usually seasonally weak between August and October. That doesn't mean that it will occur this year, but the odds favor a decline. Here is the return on the stock from August to September the last five years: 1998: 22% decline 1999: 19% decline 2000: 12% decline 2001: 30% decline 2002: 42% decline I might lose on this trade because of the market's momentum, but for now I'm going to hold my short position. At some point the stock should retrace if institutions, which hold 98% of the outstanding, agree with me that the stock isn't cheap, and that TOY's problems will continue or get worse. I do think that the stock is a good buy closer to support in the high 10s to low 11s.