Yeti Stock Chill Could Continue Into Earnings

YETI's RMI looks promising, but share volume is low as investors look ahead to quarterly results

by Bernie Schaeffer

Published on Jul 9, 2019 at 6:20 AM
Updated on Jul 9, 2019 at 6:20 AM

In the perpetually expanding universe of hipster-friendly initial public offerings (IPOs) -- Uber (UBER), Lyft (LYFT), Beyond Meat (BYND), Slack (WORK) -- the producer of intentionally homely coolers known as Yeti Holdings Inc (NYSE:YETI) is remarkable for any number of reasons. Yeti hasn't been at the center of any kidnapping charges or labor walkouts that we're aware of, for starters. And it certainly hasn't been accused of "disrupting" any industries, unless you consider "make it monochromatic and clunkier, but expensive" to be a major shake-up in the cooler space.

In accordance with that relatively low-key corporate profile, YETI never quite generated the kind of runaway Wall Street hype train of an Uber or a Beyond Meat. Instead, the general reaction to its October 2018 trading debut seemed to be, "Three hundred dollar coolers, really?" -- and as a matter of fact, the headline of a CNBC article published on YETI's first day of trading sums it all up pretty perfectly: "Yeti CEO shrugs off his IPO's drop and defends the high prices of his premium coolers".

Given that chilly initial reception, YETI never quite had the chance to develop the "freshman market cap bloat" that can sometimes plague Wall Street newcomers. As such, the stock now sports a "micro" market cap of about $2.51 billion (less than one-third that of BYND, for reference, and several orders of magnitude smaller than LYFT and WORK -- let alone UBER), even as Yeti's share value has increased by roughly 67% from its IPO price of $18.

In fact, at its late-April highs around $36 -- double its IPO price, and a level we'll return to later -- YETI was up 146% on a year-to-date basis. The stock then sold off through May on a negative earnings reaction, but that sell-off was caught by the 126-day moving average (around the 60% year-to-date level, for what it's worth). Since that "catch," YETI has clambered back atop its 40-day and 80-day moving averages -- but since June 24, the stock has consolidated around the round $30 level, which coincides with a 100% year-to-date return at $29.68.

This past week was remarkable in terms of the aggression with which YETI took on both of these two psychologically significant levels. Last Monday, July 1, the shares opened the week by taking out $29.68 on a daily closing basis for the first time since May 6 -- albeit, before pulling back to 80-day support the next session (and closing back below 100% YTD in the process). That said, the shortened pre-holiday session on Wednesday, July 3, yielded YETI's first intraday move and first close above $30 per share since May 6, after this round level marked the precise intraday highs on May 7 and May 14. Last Friday's close above $29.68 was its first weekly finish back above both $30 and the "100% YTD" barrier since May 3, and its second straight daily close in this territory.

So, after months of cooling its heels below this level, does YETI have a chance to make a decisive breakout move away from the problematic $30 level before its (tentative) Aug. 1 earnings report? As it stands now, there are several factors that suggest the answer is "no."

Options traders, who are overall call-skewed, certainly haven't overlooked the importance of the 30 region. The July 30 strike is home to peak call open interest of 4,169 contracts, with another 1,542 contracts at the weekly 8/2 30-strike call. But while the July 30 call carried implied volatility (IV) of about 41% on Friday afternoon, the weekly 8/2 30-strike call carried about 64% IV -- a message from the options market that price action is expected to be relatively tame for YETI in the short term... at least until its next expected earnings report, when the term structure goes near-vertical in terms of volatility expectations.

But the options market is simply pricing in a repeat of Yeti's history. The stock's two major directional moves this year were launched by gap moves in response to earnings reports: one bull gap in February, and the previously described May bear gap. Both of these earnings-driven moves were directly preceded by the type of price action in YETI that can be most efficiently described as a "directionless chop" -- and the fact that the equity's 30-day historical volatility is very modest currently, at 42.8% (in the 12th percentile of its range, per Trade-Alert), suggests that the stock may already be narrowing its movement profile with the next earnings report now expected to be less than a month away.

With a short interest-to-float ratio of nearly 25%, and a short interest ratio of 8.2 days to cover, it's possible that YETI's latest attempts at a breakout above $30 could potentially rattle some of the weaker bearish hands into a "short squeeze" situation. However, such a scenario is perhaps exponentially more likely after earnings, when big volume is rushing into the stock.

By contrast, when volume is relatively light, this situation frequently puts the shorts in the driver's seat to such an extent that they can, if they do choose, cap the stock with reckless abandon. This "low-volume" circumstance is frequently the situation in the weeks ahead of earnings, and it's verifiably the case with YETI now -- despite the "big technical breakout" above $30.

And returning to the idea of a post-earnings move, note also that something on the order of 25% of YETI open interest expires pre-event with the front-month July series -- potentially clearing some options-related congestion around $30 in the process, while continuing to stall the shares in the immediate term.

Furthermore, the 20-day Relative Momentum Index (RMI) looks quite healthy, in a manner comparable to that of December and January. In fact, the shape of the price action, then and now, is uncannily similar -- right down to the "pause point" resistance (except back then it was at the $18 IPO price, vs. $30 now). If we keep this analogy going, it suggests $30 will indeed be taken out to make room for a second leg up here, even if that process requires some additional time for backing and filling (not to mention a proper catalyst, perhaps of the quarterly earnings variety).

But YETI bulls should specifically hope for a post-earnings gap that puts the potentially thorny $36 level firmly in the rearview. Not only did the stock immediately retreat after crossing this "double IPO" point intraday on both April 29 and April 30, but it closed sharply lower the next day -- the May 1 pre-earnings session, to be exact -- after peaking precisely at $36 per share. Plus, $36 marks a $3 billion market cap, and it coincides with analysts' average 12-month price target of $36.64.

yeti daily chart 0705

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, July 7.


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