Options Corner: Winnebago's Implosion Could Signal A Comeback Opportunity

After suffering a recent earnings miss combined with a challenging economic backdrop, shares of recreational vehicle provider Winnebago Industries, Inc. WGO have printed gobs of red ink over the trailing month. Nevertheless, historical data reveals that investors tend to view bouts of unusual volatility as a buying opportunity, thus making the case for bullish speculation.

First, one of the main contributors to the downside in WGO stock centers on the underlying company's fiscal-first-quarter results. Winnebago reported an adjusted loss per share of 3 cents, badly missing analysts' consensus view of 20 cents. Further, revenue slipped 18% on a year-over-year basis to $625.6 million, also missing the estimated target of $672.232 million.

Second, management provided additional context, but this failed to bolster investor confidence. "As expected, the RV and marine operating environment remained challenging in the first quarter, marked by subdued consumer demand and a cautious dealer network reluctant to make significant commitments on new orders ahead of the historically slow winter season," said President and CEO Michael Happe.

Nevertheless, the head executive stated that the company anticipates a rise in demand as the RV and marine markets enter the more sales-friendly spring season. To be fair, analyst views on a turnaround for WGO stock are split. However, a fundamental argument for upside speculation does exist.

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Historical Trends Favor WGO Stock as a Value Play

Under normal market circumstances, Winnebago stock tends to carry a neutral trajectory. Specifically, over the trailing five years, the odds that on any given Friday, WGO would generate a positive return relative to Monday's opening price comes in at 50.2%. This figure is calculated by dividing the number of positive weeks over the total number of weeks in the dataset (i.e. last five years).

However, this baseline metric doesn't reveal the emotional shifts in sentiment that may occur during periods of unusual volatility. In other words, pricing events that extend multiple standard deviations below the mean could impact the fear-greed continuum much more greatly than normal market sessions. Therefore, data-driven investors may be better served with a Bayesian inference to calculate conditional probabilities.

Last week, WGO stock lost 9.49% of its market value, which is a rare occurrence. In the past five years, there have only been 14 instances (not including last week) where WGO lost 9.49% or worse. Interestingly, eight of the following weeks saw a positive return or a success ratio of 57.14%.

Additional context makes Winnebago even more enticing. Four of the weekly losses totaling 9.49% or worse occurred in February and March of 2020. Presumably, most investors agree that COVID-19 represents a unique market impact that's unlikely to materialize again anytime soon.

Taking out the impact of COVID-19, the success ratio improves to 70%, with 10 weeks seeing a loss of 9.49% or worse and seven of the following weeks resulting in a positive return.

A Bull Call Spread Beckons

Considering investors’ tendency to buy the dip in WGO stock, speculators may want to consider bull call spreads of Winnebago shares. This options strategy involves buying a call and simultaneously selling a call, both for the same expiration date. The idea is to take the credit from the short call to partially offset the debit paid for the long call, thus discounting the long position.

For WGO stock, the next available options chain expires on Jan. 17, 2025. Given the skepticism surrounding Winnebago's business and comeback intentions, market makers are currently providing attractive pricing for bull call spreads.

For example, the Jan. 17 47.50/50.00 bull call spread — buy the $47.50 call, simultaneously sell the $50 call — carries a net debit of $125 after applying the options multiplier. Should WGO stock hit or exceed the short call strike price of $50, the payout is the difference between the strike prices minus the net debit paid or $125.

In other words, within a few weeks, bullish speculators have the opportunity to pocket a 100% payout. That's an enticing proposition, given that, statistically, investors tend to load the boat when WGO stock encounters unusually steep volatility.

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