How to Play Harley's Worst Nightmare for Big Profits (Again)

Our nation loves an underdog.

It's in our collective DNA because it makes us feel good.

Social scientists have a few theories as to why, and they range from schadenfreude (the pleasure we experience when others experience misfortune), to a sense of fairness, to the sense of hope that emerges from unexpected success.

I think it comes down to people believing that there's a lot more to gain if there's an upset.

It doesn't matter whether we're talking about sports or money; people consistently play to their emotions.

Take Harley-Davidson Inc. (NYSE: HOG), for example.

The legendary American motorcycle maker is in deep trouble.

Shares are off 55.41% from their all-time high of $75.87 on Nov. 22, 2006.

Shipments are the lowest they've been in years, and dealers can't sell through the stock on hand at the speed they need to keep things moving – pun absolutely intended.

Plus, from 2014 to 2017, sales declined 9.33% – from 6.23 billion in 2014 to $5.65 billion in 2017.

Officially, the industry-wide story – at least as Harley tells it – is that the boomers are getting too old to ride, and the millennials just aren't interested.

I don't buy that.

Harley's primary competitor, Polaris Industries Inc. (NYSE: PII), is growing revenue 15.40% a year by offering a "family" of motorsport vehicles, ranging from all-terrain buggies to snowmobiles, and– yes – motorcycles. Many of which are offered at far lower price points and, dare I say it, far higher quality with far better engineering than Harley – including the highly successful, recently relaunched Indian brand.

Harley CEO Matt Levatich doesn't see things that way, of course.

He's embarked on a program to launch 100 new motorcycle models by 2027 – a project that will have Harley spending millions on marketing, new ridership programs, electric motorcycle development, and more. The company's adding dealership locations in China, India, Norway, Spain, and Thailand.

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But what Harley really ought to be doing is what BRP and Polaris products are already doing: producing leaner, smaller, and less expensive bikes for urban, younger, and increasingly female riders.

... like the BRP 2019 Can-Am Ryker or Polaris Slingshot.


Image result for 2019 can-am ryker polaris


Why the Ryker Is Harley's Worst Nightmare

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The Ryker is far lower to the ground than other offerings, which means aging Harley riders who would otherwise quit riding can still "swing a leg" over and head across country. So can many women, for whom the fear of dropping from an 800+ pound motorcycle prevents them from riding – let alone buying into the sport in the first place.

What's more, the Ryker has a continuously variable automatic transmission, giving it "twist and go" simplicity that will appeal to both new riders and riders who simply don't want to bother with shifting. That's appealing to a new generation of riders because many of them grew up on scooters and are transitioning to motorcycles for the first time.

Plus, the Ryker is loaded with safety features, including traction control, electronic stability, and even anti-lock brakes. Further, there isn't a chain in sight because the Ryker uses a shaft drive to put power on the pavement.

The body panels are a simple plastic composite, which means you can swap them out for different color combinations or customize them easily without lifting a single wrench. There are even "limited edition" accessories that are sure to appeal to the iPhone-set mentality.

I've really got to hand it to BRP.

The company says that there are more than 75,000 ways to customize the Ryker, but I think the real home run is the fact that you can get your hands on a Ryker for less than $10,000 at a time when Harley doesn't have a comparable offering. In fact, they offer only a single motorcycle model for sale at that price point.

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So, now what?

We've followed Harley's "breakdown" for a while – and quite profitably at that.

For example, the HOG February 15, 2019 $42.50 Put (HOG190215P00042500) I recommended on Sept. 15 are now up 315.12%... and climbing.

That's enough to turn every $1,000 invested into $4,151.20, and every $10,000 invested into $41,512.

Shorting the stock is still a good idea, if you've got the stomach for it.

However, that's also an increasingly dicey bet because doing so means you're playing against insiders who will fight tooth and nail as Harley comes unglued. I simply don't think that's worth the unlimited risk shorting entails, unless you've got the rock-solid discipline needed to pull it off under today's challenging market conditions.

Alternatively, you could pile into the same February put options I've already recommended. They could double again from here without much trouble, if Harley really falls apart when it posts its next set of earnings around Jan. 28. Just understand ahead of time that they're pretty richly priced at this point.

What I'd rather see you do, if you're just getting on board or want to continue playing along, is to wait for an uptick that will sucker people into thinking Harley's "back." Ideally, there will be a news story or two that'll help create a temporary reality distortion vortex.

At this point, I'd recommend buying the HOG February 15, 2019 $30 Put (HOG190215P00030000) for $0.63 or less. Right now they're trading at around $0.86 per contract, which is why I'm suggesting you wait for the reality distortion vortex associated with a temporary price increase in Harley's stock.

Tactically speaking, this is like a head fake in American football, intended to make the defense believe the ball is being carried one way when, in fact, it's going the opposite direction.

This is one of my favorite moves because put premiums collapse when everybody else thinks prices are headed higher, which means the probability of profits shifts in your favor.

It's also a phenomenon that's unique to options because they're priced differently than stocks. Time and volatility play a significant role in how, why, and when they'll move.

As always, what I am suggesting today is a speculative trade, so treat it accordingly by limiting the risk to money you can afford to live without, if it doesn't go as expected.

In closing, to be clear, I am not wishing Harley any ill will.  I've met a lot of Harley riders over the years, and they're all terrific people.

It's Harley's management I'm concerned with, at a time when the markets desperately want results.

Not another road trip.

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According to the TransAmerica Center for Retirement Studies, baby boomers are now setting the standard for this terrifying new normal for generations to come.

In fact, reHIREment is slowly infiltrating our society, which would explain why 9 million reHIREes are currently trying to make ends meet in offices, libraries, and schools across America right now.

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The post How to Play Harley's Worst Nightmare for Big Profits (Again) appeared first on Total Wealth.

About the Author

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

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