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Sell Myer, but still win in a takeover

Myer stock replacement strategy

Some stories are comforting because they are familiar. Others seem like a recurring nightmare. Myer shareholders may be forgiven if they place last week’s half year profit results in the latter category.

First half sales fell by 3.6%. There is an impairment charge coming and management did not give a number. The six month profit of $37-$41 million doesn’t leave much room to move.

Perhaps worst of all CEO Richard Umbers said “Myer…remains resolutely focussed on foot traffic and sales across all channels….” With respect to Mr Umbers this is the greatest “der” moment of reporting season. The problem is it looks like there is still no “how” to go with this “what”.

The market response was predictable. Share trading volumes surged. Myer shares found a new all-time low. And on Monday six major brokers downgraded the stock. Earnings downgrades are the recurring part of the Myer shareholder nightmare.

Yet many investors are holding on. The psychological aspects of investing can make it hard to act on the poor investment choices we all sometimes make. Shareholders who think that Myer’s prospects look very dim but are unable to push the sell button may consider a stock replacement strategy.

This involves selling the stock and redeploying most of the proceeds. A small amount is spent on Myer call options. With the stock trading at 54 cents the right without obligation to buy Myer shares at 65 cents at any time up until June (Myer June 65 call) was offered at 2.5 cents.

Holders of a call option do not receive dividends. If Myer edges higher to 60 cents the holder of the call option will receive little benefit. However if Mr Solomon Lew, a vulture fund or anyone else makes a takeover bid, the call option holder participates in all the gains above 65 cents. In the meantime most of the capital (say 54 cents less 2.5 cents equals 51.5 cents per share) is safely in the bank or invested in another stock.

The stock replacement strategy is the “no regrets” way to sell an underperforming stock.

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