Why My DKS Trade Failed

One of my core beliefs is that mistakes are the royal road to growth and improvement. While painful, analyzing one’s mistakes is the best way to learn hard lessons that will take you to the next level. Unfortunately, you never stop making them as illustrated by my trade yesterday (Monday) ahead of Dick’s (DKS) earnings.

DKS is the leading athletic retailer with 723 stores. Comps have been strong for many quarters and the valuation is good. I owned a small position in IRA accounts prior to yesterday when I bought a few shares for margin accounts. I also sold Sep25 $165 Puts for ~$5 in margin accounts.

That trade is going to be a loser today as DKS just reported disappointing second quarter earnings – primarily due to difficulty at recently acquired Foot Locker (FL). The stock is currently -16% in the premarket to ~$150. Ugh!

What did I do wrong? I made a very common mistake: I was bored and looking for action. The constant news cycle and daily trading on Wall Street sends a message: “Don’t just sit there. Do something.” Generally, the opposite is the best policy: Do thorough research and only act after careful deliberation. If you haven’t done thorough research, do nothing. It’s hard to avoid the temptation to overtrade but doing so is a recipe for losing money.

In this case, I got home from a trip to Rohnert Park to play poker where I took a break from the market for three days. Anxious to get back in the game, I saw the recent selloff in DKS shares as an opportunity. I figured sentiment had soured for whatever reason which provided an opportunity.

In retrospect, I now realize that the recent selloff is the result of the market’s concern about DKS’s Foot Locker acquisition. Sophisticated traders and investors were selling the stock for this reason.

Unfortunately, I didn’t do enough analysis to understand that. I knew DKS had recently acquired Foot Locker but it didn’t occur to me that the integration might be problematic in the short term causing a serious dislocation in the stock. And that’s exactly what’s happening today.

Owning up to my mistake, however, allows me to do damage control. The trade is a failure. I read the earnings report and it was not good. I’m not going to hope my trade somehow works out or isn’t as bad as it looks. I’ll buy back the puts I sold and take the loss.

However, now that I understand what’s going on, the dislocation in the stock may be providing an excellent entry for a longer term investment in DKS. I like DKS for the long term – even if the Foot Locker acquisition isn’t going as well as hoped for in the short term. Today’s selloff may provide an opportunity to buy a high quality business in a secular bull market (sports/fitness) with a runway to increase its store count going forward.