Hello SOTGC community,
I never pay full-price for clothes or shoes. If it’s not at least 30% off, I don’t buy it. But sometimes the things I want don’t go on sale, so I have devised an innovative strategy to make a virtual sale. Intrigued, aren’t you?
Last week I shared my secret strategy with Catherine Cassidy, CEO of U*Styled. Catherine’s a personal stylist with a savvy business edge since she teaches clients how to get a high return on investment (ROI) from their wardrobes. In her Create a Wardrobe You Love Action Plan, she recommends setting a monthly budget for wardrobe updates that will complement a few high-quality staples already in your closet.
Instead of creating a monthly budget, I prefer to think in terms of an annual budget. $2,000 is the amount I’m willing to spend each year on clothes, shoes, and purses in colors that will enhance my mostly black wardrobe staples. But instead of keeping this money in the bank, I keep the cash in my online brokerage account to go towards my “retail investment fund.” It’s the money I use to invest in the stocks of companies that own the brands I love.
My favorite brands include Lululemon, Michael Kors, Coach, Kate Spade, and Ann Taylor. I refer to these companies by their stock symbols: LULU, KORS, COH, KATE and ANN. These brands are owned by companies that are publicly-traded and must report their earnings every quarter, so that’s when I do my online shopping.
When a company reports its financials and they don’t meet Wall Street’s expectations, or their sales forecast is lower than anticipated, the stock price can drop sharply. Since I keep a watch list of a handful of stocks (and you can too — even on your mobile phone), I get an alert when the price of one of these stocks falls significantly. It’s no different than the mobile alert I get from my favorite retailer announcing a sale.
This graph shows what happened to KATE’s stock price last week after its quarterly earnings announcement:
This article attributes most of the stock price decline to the company’s decision to mark down its prices due to weak sales and high inventory. Although on August 12 the stock price closed at $29.00, according to this article, the average price target for the stock among analysts is $40.13. (Click here to learn more about price targets.) Sometimes the market overreacts and a stock price goes back up over time.
I asked Catherine what she thought about the company. “I believe Kate Spade will be able to course correct,” she said. “They have a really strong brand and they know the women they’re designing for. I also love that they offer unique styles for women to update their wardrobes.”
While the analysts have a price target, I have a purse target. Here’s what I have my eye on now: the “Cecil Court Bobi” purse in snap pea green by Kate Spade, as pictured below. Catherine agreed it would look stunning with my black sheath and pumps.
The retail cost of the purse is $268. I’m willing to buy it for 30% off or about $188. That means that I have to generate an $80 virtual coupon. Can I really generate it from the stock market?
As mentioned earlier, I have a $2,000 budget. Assume I allocated half of my $2,000 budget to purchase 33 shares of KATE last week after its dip and paid $30 a share. The cost to purchase the shares would be $990 plus a $10 commission.
Should the stock price climb halfway to its price target, I could decide to sell my 30 shares at $35 per share. After paying a $10 commission to sell, I would net $145.
Since federal and state tax rates vary according to income, marital status, and geography, most readers will have a lower overall tax rate than me since I live in California. But for this example, I’ll use a median combined federal and state tax rate for short term capital gains of 33%. So after deducting the 33% I have to pay for tax, I’m left with over $100, more than enough to generate that $80 “coupon” I’m after. And if the analysts are right and the stock reaches $40 (and if I hold the stock for at least a year, which turns the short term gain into long term gain and lowers my tax liability significantly), I might generate enough in gains to pay for the entire price of the purse! If that happens, then I still have $2,000 to allocate to my retail investment fund and I have a new purse.
Can I lose all my money? Theoretically I can, if KATE goes bankrupt. But when I buy stock I often place a stop order at 15 or 20 percent below the price I paid. That ensures that I can only lose a small amount of money and get out before the stock becomes worthless. Furthermore, when I trade stocks in a taxable brokerage account, I can offset my losses against other capital gains or even take a deduction on my income taxes. It softens the blow when I sell a stock at a lower price than I paid for it.
What if the stock price just lingers after months and months? I have the option of keeping my $1,000 where it is – invested in stock. Don’t forget I still have the other $1,000 to use for shopping. And is that really a bad outcome when it results in $1,000 being spent and $1,000 being saved and invested? So what if I have one less purse hanging in my closet?
Investing in only stocks that you like can be a risky strategy unless you diversify your investments among different industries, geographic regions, and asset classes. If you are contributing to your employer’s 401(k) you are likely invested in mutual funds that spread your money across a wide variety of stocks and/or bonds. But if you’re not sure, you might want to have a 401(k) tune-up as part of a beginning investor’s coaching program. When I’m working with men or women who are just starting to invest in individual stocks, I advise that no more than five to ten percent of investable assets be concentrated in one stock. So if you have a 401(k) or IRA balance of at least $30,000 which is well diversified, investing a couple of thousand in one or two stocks you like is reasonable, especially if you were going to blow that money on clothes and accessories anyway!
So how will you know if I actually bought KATE stock and if my 30% off strategy was successful? You can put KATE on your watch list and follow the stock price every week or look at Yahoo Finance. But the best evidence will be if you see me out and about with a green purse, each week with a different outfit (assembled with Catherine’s advice, of course).
Disclosure: The information contained in this article is strictly for educational and illustrative purposes, providing commentary, analysis, opinions, and recommendations and should not be considered investment advice for any specific subscriber or portfolio or an offer to sell or a solicitation to buy any security.
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Laurie Itkin is the founder of The Options Lady and the author of Amazon Best Seller, Every Woman Should Know Her Options: Invest Your Way to Financial Empowerment.