DKS: Prepare to Whack-A-Mole

Given the disproportionate impact sell-side upgrades/downgrades have had on stocks as of late, when I saw that GS upgraded DKS this morning, I thought it would provide a good ‘ol Whack-A-Mole opportunity on a high-conviction negative fundamental call whose stock I have eased up on as it retraced to the teens.

I guess not. The stock closed down on the day despite the upgrade. Even in a lousy tape – this is a bad signal.

Granted, the call sounded something like “We think the quarter is ugly, and the stock is probably headed lower, but we’re taking the month of August off and want to be in print as having called the miss, and telling everybody to buy into it.” I was a little surprised by weakness of the call itself, as I think the analyst there is one of the better ones in this space. But it’s still a Goldman Sachs upgrade and should have decent impact in itself.

One of the key factors that people hit me with is that DKS is cheap. But they said it was cheap at $30. Then $25. Then $20. Read my 5/22 post for the full thesis on DKS. There’s no reason why 6.5-7x EBITDA needs to be trough value for a name like this – especially if cash flow growth slows and/or goes negative over the next year.

Again, I was hoping for the Whack-A-Mole opportunity, as I fully understand that no story is linear (either up or down). Short interest is 21% of the float now – up from 6% about $15 ago. I’d love nothing more than to see this mole pop on a sandbagged quarter.

Brian McGough

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