2 Trade Ideas for a Small-Cap Canada Firm Set for Major Tariff Impact
As a Canadian cold weather clothing company wrestles with a burgeoning trade war, here are two ideas for investors to profit.
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It's hard to think of a publicly-traded company whose stock may be more impacted by this trade war that also fits into the"Stocks Under $10" profile than that of Canada Goose GOOS.
The firm creates almost none of its goods in the U.S. However, while Canada Goose does sell the firm's high-end, high-performance cold weather clothing in about 50 countries, the U.S., in 2024, drove a rough 24% of total sales in terms of revenue for the Toronto, Ontario based firm. About 70% of the firm's merchandise is manufactured inside of Canada, while the other 30% is manufactured in the firm's facility in Romania and by contract manufacturers for European markets.
The stock is already taking a hit on Monday morning and will potentially make headlines when it reports its fiscal third quarter financial results on Thursday morning. Wall Street is looking for GAAP EPS of C$1.09 on revenue of C$615 million. The quarter will compare to C$1.02 on $609.9 million for the year-ago period, but the performance and the comparisons will not be the focus. The focus will be on what CEO and Chair Dani Reiss has to say in regard to working around these tariffs and whether or not the firm has a plan if these tariffs last a good while. The firm at least had a lot of merchandise in inventory and a lot of debt to service, while operating and free cash flows have been negative for successive quarters.
News!
While it's very good news that Mexico has already backed down and pledged to send 10,000 troops to the U.S. border to assist U.S. forces in preventing the flow of drugs and illegals across that line between the two nations, there has been no such concession made (at least not yet) by Canada. Therefore, Canada Goose as a tariff trade is still in play.
Technicals
Canada Goose, at least as of January 15, ran with 29.15% of its entire float held in short positions. Know what level scares me off from shorting a stock that I think should go lower? Something like 8% to 10%. So, while I'd like to think that I could short GOOS and make some dough, I'm not going to go there.
Readers can see that going to the weekly chart, GOOS has put together a descending triangle pattern which is bearish, and it looks like it may be coming to a close. Now, take a look at this:
On the daily chart, GOOS has put together a cup with handle pattern, which would be bullish if the stock can pull out of that handle. The upside pivot would be $12, and if triggered, the target would be around $15.
Trade Ideas
We'll go on out to March 21, which is when monthly expirations will occur in March. Yes, that will be a triple-witching of expirations, so we have some time on our hands for something to play out.
1. Bear Put Spread
Purchase one March 21 $10 put for $0.60, sell one March 21 $9 put for $0.35.
Net debit: $0.25.
Notes: Trade needs the stock to trade at $9.75 or lower by expiration. Profitability maxes out at $9.00.
2. Bull Call Spread
Purchase one March 21 $11 call for $0.75, sell one March 21 $13 call for $0.25.
Net debit: $0.50.
Notes: Trade needs the stock to trade above $11.50 or higher by expiration. Profitability maxes out at $11.00.
Both Trades
Net debit: $0.75.
Notes: With both trades initiated, stock would have to trade at $9.25 or lower or $11.75 or higher. This makes the bear put spread hardly worth it, but it does help cover both bases if the bull call spread is wrong.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
