Harley-Davidson Inc. (NYSE: HOG) shares are falling today after a research report was released this morning by Soliel that indicated HOG may lower its guidance. If you think this stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on HOG. After hitting a one-year high of $66.00 last April, the stock hit a one-year low of $34.17 in March. This morning, HOG opened at $36.47. So far today the stock has hit a low of $35.34 and a high of $36.47. As of 12:40, HOG is trading at $35.80, down $1.26 (-3.4%). The chart for HOG looks bullish but deteriorating, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bearish hedged play on this stock, I would consider a May bear-call credit spread above the $40 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 11.1% return in five weeks as long as HOG is below $40 at May expiration. Hershey would have to rise by more than 12% before we would start to lose money. Learn more about this type of trade here.
HOG hasn't been above $40 by more than a little bit since January and has shown resistance around $39 recently. This trade could be risky if the company's earnings (due out on Thursday) are a positive surprise, but even if that happens, this position could be protected by resistance HOG might find just above $40, where the stock has topped out a few times in the past three months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in HOG.
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Reader Comments (Page 1 of 1)
4-15-2008 @ 9:42AM
Al Murphy said...
H-D is going to have a tough road to travel to get back to where they were in these times.
The demographics they were focused on was never the entry-level motorcycle rider, but the experienced riders, who knew that for long trips, the Honda cycles were cheaper to maintain, along with needing less maintainance across the board.
To compound this, this demographic group seems to be feeling the crunch of this recession more than most, finding their discressionary funds being eroded away by the rising cost of gasoline, among other things, IMO.
True, a H-D motorcycle holds its value, but if there isn't a second-tier buyer's market for the used cycles, selling new is far more difficult.
And, lastly, the EPA regulations that went into effect requiring all vehicles, including motorcycles made after 2006, to be inspected for and pass emmisions standards is sinking in to the cycle community, making anything made after model year 2005 worth less as it goes out of warranty.
The about is a opinion based on personal observation, and I do not own or have owned stock in HOG, nor plan on doing so.
4-18-2008 @ 2:45AM
ab said...
Great post and comments by Mr. Murphy.
I've worked at a H-D dealer for over 15 years. The company's problem is definitely product related. We have no enticing entry level bike. Sorry, but the 883 does not excite people. Meanwhile, they continue to support the Buell line, which is popular in some areas, but overall is not a good seller. The V-Rod line has been a disaster, despite the fawning press coverage. They continue toe expand and contract that part of the line-up. Up and down the product line, you'll see below average product. They ignored the trend toward custom bikes until it was too late, and then came out with the Rocker which is the same price as a full dresser (Electra Glide). There are also too many models. Moving up, the touring bikes are very weak compared to the competition such as the Goldwing and BMW. In part, these are apple to orange comparisons, but more than ever people don't care about the "mystique." It is wrong for the CEO to just blame the economy without addressing product issues.
Another point, EVERY customer thinks there new H-D will sound great. They don't. As Mr. Murphy mentions, the EPA requirements have changed everything. To put on pipes and air cleaner to get that Harley sound, a customer must spend $1,000-$1,500 because a "download" is needed. This is insane. Our service department work has plunged in part because of this. I understand the need for the EPA changes, but it has been very detrimental to dealers.
Interestingly, used bike sales are soaring. We can't even find used bikes, and have recently turned to auctions for pre-owned bikes.