Chico’s FAS Inc. (CHS), a specialty retailer of casual to dressy clothing and accessories, reported lower first quarter profit due to a decline in sales. The company continues to expect negative comparable store sales and lower earnings for the first half of 2008. Net income posted by the company plunged to $12.7 million, or $0.07 per share, for the first quarter from $47.2 million, or $0.27 per share, a year ago but beat analysts’ estimate of $0.06 per share. Net sales for the quarter declined 9.6% to $409.6 million from $453.1 million reported for the same period last year, reflecting a 17.5% decline in comparable store sales. Fifteen analysts estimated revenues of $416.58 million. For the first half of 2008, the company continues to expect negative comparable store sales and expects to have lower earnings than the first half of 2007.
The fact that the company beat estimates made the stock spike more than 12%. However i believe this is a bogus rally. That said, shorting on the first day of a big spike up is not always a good idea.
The reasons being
- 11% shorts will start covering. This short squeeze might take the stock higher.
- This upswing can lead to change of sentiment among investors bringing in more buyers.
- The stock sits very close to 52-week low making it a safer long bet in terms of risk/reward.
Knowing this fact i stayed away from shorting CHS. However after the initial spike from $7.50 to $8.15 in less than an hour, CHS saw a selloff. It dipped to $7.91. I expected it to crack down and i shorted 1000 CHS @ $7.93 only to see it go up again ending at $8.14. I covered 500 at $8.09 with a loss of $80 and holding 500 overnight hoping it slides back.
Ideally I should have not played CHS today like i earlier stated. Until all the buyers dry out and start selling and the smart short sellers jump in, its not a safe short.
Rule: Never short a stock on the first day of a big spike.