13 Percent in Only 9 Trading Days

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Two weeks ago in A Pattern of 18 Percent Average Gains , we looked at Callaway Golf (NYSE: ELY ) and noticed a pattern in its returns. Due to the effects of seasonality, if you bought its stock on July 20 th and sold it on April 1 st of the following year, your average annual gain over the last 10 years would have been 18.4 percent. You also would have made a profit in 7 out of 10 years. Being right 70 percent of the time is pretty good in any market.

Two weeks ago when we looked at Callaway, the stock opened at $5.97 a share. In last Thursday's trading session, the stock reached a high of $7.10, a return of 18.9 percent in just 8 trading days. I hope you had a chance to take advantage of this opportunity.


Today I wanted to check in on the company and give an update on fundamentals and the stock price. The company reported earnings on July 28 th after the bell. Let's take a look at the results and see how the stock has reacted.

***Callaway's net sales were flat this past quarter, but increased by 6 percent for the first six months of fiscal 2010. Net income increased by $4.6 million, or 11 percent, in the second quarter.

Excluding the $0.01 charge related to its Global Operations Strategy, Callaway's adjusted EPS of $0.15 beat analysts' estimates of $0.14 by a penny, according to Thomson Reuters.

Many investors anticipated sub-par results from the company this past week - mainly because the company had lowered its outlook for the quarter back in June. In the sixteen hours (two sessions) prior to Callaway's second-quarter earnings report, investors locked in profits and stayed clear of any uncertainty. The stock dropped 6.9 percent in those two days of trading.

http://img.bfpublishing.com/sci 8.2 1.PNG

However, you can see that investors quickly jumped back into the stock the day after the company reported earnings. The stock reached a high of $7.03 on Friday, up 5.4 percent from its open on the previous day.

Although investors focused on the positive aspects of the earnings report, the outlook for Callaway and the golf industry is not as attractive as some had hoped.

***The golf industry is still trying to recover to its previous levels of growth, but lower spending due to a slumping economy has hurt Callaway and other competitors. CEO George Fellows had this to say:

"While the golf industry will recover, given recent increased uncertainty regarding retailer and consumer spending in the back half of the year, it does not appear that the industry will fully recover during 2010" .

CFO Brad Holiday added,

"The unusual uncertainty caused by the current macroeconomic and market conditions make it impossible to forecast retailer and consumer demand for golf products with any reliability" .

The comments of both executives go to show just how the current environment is impacting the industry, and the company.

With so much up in the air, Callaway plans to focus on aspects of the business it can actually control - including improving operations, closely managing discretionary spending, and investing in high-growth areas like emerging markets to drive shareholder value.

Callaway's second quarter sales in the U.S. were lower by almost 1 percent year-over-year. Although this decline in domestic sales is not bullish for the company, it does currently bring in around half of its revenue from international sales - so there is a market opportunity out there. The chart below shows a breakdown of sales by location.

http://img.bfpublishing.com/sci 8.2 2.PNG

International diversification should continue to support the company's revenue stream and decrease its dependence on the US recovery. Developing countries generally recover faster than developed countries after an economic downturn.

Although the company's outlook for 2010 continues to be uncertain at this point, I think Callaway is a strong company and should perform well in the future - partially because it is expanding into key high-growth markets.

***Now if you bought the stock at the open on July 20 th , the ultimate question is what to do with your current 13 percent gain (the stock has pulled back a bit). This 13 percent gain came in only 9 trading days. Remember that the average gain (from my previous article on Callaway) was 18.4 percent - but over 9-months. Should you wait 9 months when you're close to making the same amount in only 9 days?

Well, looking at the returns for this trade over the last ten years, we see that two years generated returns (over the period discussed above) of 58 and 78 percent. If you dump the stock now, you may be kicking yourself in April if similar gains materialize. I'd be inclined to hold the stock for now, and look to exit anytime you're up 20 percent or more.

However, if you're happy with a 13 percent gain in 9 days I wouldn't blame you for selling. That's around the long-term annual average return for the S&P 500, but in 356 fewer days.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: ELY

Wyatt Investment Research

Wyatt Investment Research

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