Buy Alert: Cato Corp. (CATO)
TRADE INSTRUCTIONS
Date: February 1, 2017
Name: The Cato Corporation
Symbol: CATO
Type: Open
Limit: Buy below $26
TRADE TARGETS
Holding Period: 3 months
Target Return: 11.5%
Annualized Return: 46%
Target Price: $29
Stop Loss Level: $23
COMPANY DESCRIPTION
The Cato Corporation is a fashion specialty retailer that sells primarily to junior/misses and young women. The Company’s merchandise lines include dressy, career, and casual sportswear; dresses, coats, shoes, lingerie, costume jewelry, handbags; and lines for kids and newborns. Its stores are located primarily in strip shopping centers principally in the southeastern United States and offer an assortment of on-trend apparel and accessory items. Link to company website.
TRADE RATIONALE
This alert was triggered by the most technical component of our Rapid Profits Matrix, which looks for “fallen angels” that are bottoming out. A quick look at a chart for CATO confirms that it has tanked over the past three months, giving up nearly a third of its value since peaking near $36 in mid-November.
That’s because on December 1 Cato reported November same-store sales dropped 10%, and on January 5 it announced that number increased to a 12% decline for December. At the same time, the company reduced guidance for full year earnings by 20%. So how does a stock that has performed so poorly jump to the top of our buy list?
Cato is currently priced at only 1.7 times book value, which combined with its forward P/E ratio of 12 time future earnings strongly suggests it has become oversold. Also, Cato carries no long term debt and holds over $9 in cash per share, so it has plenty of liquidity with no threat to its solvency. For those reasons we’re expecting a “dead cat bounce” off its lower Bollinger Band (at $24.17 at yesterday’s close) back up towards its 50DMA value near $29.
NOTE: CATO is optionable, but trades on very low volume so use limits when placing orders.
Stock Talk
Larry Johnson
In at $25.38
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Abhijit D
Hi Jim – With the state of retail, and poor performance with other retail SW recommendations like Buckle, Kohls is this a safe bet?
Dramatic License
If it gets a quick boost like BKE did, I’ll take that in a second.
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Jim Pearce
To be clear, I am not recommending CATO from a long term perspective. I am looking for a “dead cat bounce”, and then we’re out of it.
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Jimmy Cook
Got in at $25.37. What is a “dead cat bounce”? Never heard that one before.
Jim Pearce
Its an old saying on Wall Street that if you drop a dead cat from a high enough window it will still bounce off the sidewalk: https://www.usingenglish.com/reference/idioms/dead+cat+bounce.html.
Jimmy Cook
That’s funny. Hope that cat bounces real high.
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Rick
I did a Debit Call Spread for Jul 2017 expiration BTO 25 and STO 30 – net debit was $1.58.
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Janis Bell
In at 25.01. It’s been sliding. I sure hope it goes up. Portfolio is not looking too hot overall right now.
Jim Pearce
CATO is back above our entry price this morning after releasing its January sales figures yesterday (http://finance.yahoo.com/news/cato-reports-january-same-store-120000352.html). The news was not good, but not as bad as feared, either. As a result, from a very short term perspective the stock has gone from below its lower Bollinger Band to above its upper band towards its 50DMA of $27.50 so we may be getting that “dead cat bounce” after all.
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black arrow
but since then it has definitely improved beyound a ‘dead cat bounce’
but beware of the fallen window as well as the 50 day moving avg.
http://schrts.co/I48Ikf
black arrow
Sorry to mention potentially negative report on cato chart , but yesterdays candle combined with the previous days was what is known as a BEARISH Engulfing. This may not be all bad say for someone like me who did not enter a position it could give a better entry point. But wait for a bit to enter if you have not is what I am seeing.
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Derek: Las Vegas, NV
BA, you still with us? I haven’t heard from you in quite some time, hope all is well.
Derek
black arrow
HI Derek,
Yes I am still on the right side of the grass. Sorry for not contributing more.
Actually things are great for me. Last weekend the [5] of us were biking on the Franconia, NH bike path. Even though it had record warm temps it felt cool with all the shade, and the streams sourced from nearby presidential Mtns. Spent a Fam vacation in August, in Ogunquit area – love being near the ocean..
Now this time of year we, as traders experience difficulties because summers are seasonally off. we grow to expect August to be slow; but so is september and even the start of October tends to be slow – then at long last things tend to be going our way. Cie le Vie. I have done OK with some gold related trades.
Hang in there hopefully things aere well with you too?
Jon aka BA
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Derek: Las Vegas, NV
Good to hear and good to hear things are going well.
Yes, things are going well for me, thanks.
Derek
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Skippie2000
You sure love retailers. I certainly do not agree investing in this group, but as a loyal subscriber I will continue to invest in your recommendations. I just cannot believe your program keeps bringing them to the head of the list. Thanks.
Jim Pearce
Our model is biased towards both ends of the spectrum; growth stocks gaining momentum and value stocks that have become oversold. During the first three weeks of January the stock market flattened out so our model could not find any growth stocks that met all of its requirements, but it did see several value stocks that appeared oversold. Only time will tell if that turns out to be correct, but on a technical basis the retailers look like they could be in for a nice bounce over the next couple of months.
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