"Gain
precedes loss."
-- Christina Nikolov
Where's The Discount?
by
Christina Nikolov, Founder ChartWatchCentral
Stock/Ticker: 99 Cents Only Stores (NDN)
Date: May 27, 2003
Opinion: Bearish
Current Price: $30.34
Target Price: $26.06, then possibly $22.67 and $21.30
Commentary:
Over the past three months, shares of 99 Cents Only Stores (NDN) steamed ahead by 55%, pushing the price to within 5% of a new all-time high (chart #1).Fundamentals have been impressive for the most part. On April 22nd, the company announced that per-share earnings rose 11.1% to $0.20 in the first quarter of 2003. Gross margins improved from 39.4% to 40.4%, while revenues soared 20.4% to $196.4 million.
There are some potential concerns. Same-store-sales rose only 4.3% in the first quarter of 2003, telling us that a lot of this strength was due to new store openings. At the end of 2002, the company had 151 stores open, versus 123 at the end of 2001. In 2003, NDN plans to open at least 38 new stores, 15 of which are slated for the Houston area.
Considering that NDN has been slowly expanding outside Southern California, this growth can probably be sustained for a while. However, their stores will eventually over-saturate their markets and begin to cannibalize one another as has occurred with McDonalds and other companies. So far this is not an issue, since the company has a lot of room to grow and no debt. It's just something to keep in mind for the future.
If you are looking for a bargain, we suggest buying NDN's products instead of their stock, because the shares of this 'discounter' aren't cheap. After all, if Wall Street's Prognosticators are correct and NDN earns $0.99 in 2003 and $1.20 in 2004, the shares are currently valued at 30.6 times full-year 2003 earnings and 25.3 times the full-year 2004 bottom line. A pretty outrageous valuation, considering that earnings are projected to grow 19% this year and 21% in 2004.
Since mid-April, NDN appears to have been tracing out a head and shoulders top. Overhead resistance is perched at $30.45, $30.75 and $31.66. Potential support levels reside at $27.40 and $24.75, $22.67 and $21.30. Even better, the trading activity has been declining as the topping pattern emerged over the past month (chart #2).
Within the next month, we expect NDN to undercut neckline support near $29, then plunge to our initial target of $26.06. There's a possibility NDN could eventually fall to and fill upside gaps created in March at $22.67 and $21.30 (chart #2).
To profit from a decline, we like the July 30 put (Symbol: NDNSF), July 35 put (Symbol: NDNSG) and September 35 put (Symbol: NDNUG), which are fetching $1.60, $5.10 and $5.50 respectively. Of the three, our absolute favorite is the more conservative September 35, since it is in the money and has much more time until expiration.
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Chart(s):
1) 99 Cents Only Stores (NDN) Thirteen Month Daily Chart
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Click the Chart for an Enlarged View
2) 99 Cents Only Stores (NDN) Four Month Daily Chart
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Click the Chart for an Enlarged View
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