On June 26, 2020 the news came out that Kanye would be collaborating with the classic American retailer, Gap. The stock soared over 40% from $10.17 to a high of $14.44 before closing the day at $12.28, still up over 22%.
Frustrated with Robinhood I had just opened a TD Ameritrade account that week and deposited $5,000 to get started. Then I decided to do something I rarely do: I went all in one position.
Most of the time I try to practice good risk management and not put more than 10% of my portfolio in a trade at one time. But when I looked at the chart and considered Kanye’s previous work, it felt like the stars aligned.
That $5k is now worth over $22,683.
In this article, I’m going to share the technical and fundamental analysis I did that led me to throw $5k in Gap stocks and options.
I’ll start with the technical analysis. If you find it boring or confusing, or if you don’t think TA works, just skip ahead to the fundamental analysis below. However, I personally think these charts produce some interesting insights.
This is the Gap ($GPS) annual chart. Each bar you see represents 12 months.
The first thing that immediately stood out to me was that support line at $8.89. It first reached that level in 1992 then broke through in 1996. It revisited that area again in 2001 and 2008.
The next thing that caught my attention was the very clear resistance level at $46.12. The price spent nearly a year there from March 1999-March 2000 then again from 2013–2014.
Support and resistance are one of the easiest ways to trade with technical analysis.
So here we have a very defined range. Since 1992 the price of Gap had touched or nearly touched $8.89 four times and now in 2020, it had interacted with that level for the fifth time.
Also during that time, the price hit $46.12 twice.
My initial investment thesis was buy now and sell at $46.12.
I bought in knowing this would be a long-term play. This was a trade I planned on holding for at least several years. Because of this, I decided to buy both Gap stock and options to maximize my returns. The stock has gone from $12 -> $30 (150%) but my portfolio has more than tripled.
Before getting into the fundamental analysis I have one more chart to show you:
When Adidas first confirmed their collaboration with Kanye on December 3, 2013, the stock was around $60 (the first yellow arrow).
When the Yeezy Boost 350, the second shoe in the collaboration, was released on June 27, 2015, the stock was ~$40 (the second yellow arrow).
From the announcement of the collaboration to now the stock has risen 160%. From the first major worldwide release of the Yeezy Boost 350 to today the stock has risen over 320%.
I’ll call this “the Yeezy Effect”
Now those gains may not all be from Kanye alone but the collaboration has been credited with helping build Adidas’ profile in the US.
In 2019 the brand was on track to generate $1.3 billion of shoe revenue, a 50% increase from a year earlier, according to Bank of America.
This combination of the Gap stock’s historical performance and Adidas rallying from $60 to $160 after collaborating with Kanye made me feel very confident.
Of course, the chart only tells half the story.
From a fundamental perspective, Kanye is what I would call a super-influencer. His antics often put him in the headlines, good or bad. As an artist, his commitment to delivering not just a product but an experience appeals to his young audience and customer base. From his Life of Pablo tour to his Sunday Services to his limited Yeezy releases, he knows how to build hype.
But his influence almost pales in comparison to that of his wife. Kim K has almost 190 million followers on Instagram versus his 3.8 million. She also has twice as many twitter followers.
But that’s the brilliance of their union: alone they are super influencers but together they’re a media powerhouse.
Kanye will be creating a collection of apparel for men, women, and children, and I fully expect Kim and the rest of the Kardashians to be sporting the look in front of their half a billion followers. I believe it will be a family affair.
Kanye also has a financial incentive
On June 25, the day before the announcement, Gap filed a Form 8-k with the SEC that says they have issued warrants for up to 8,500,000 shares of Gap stocks in a private placement with Yeezy Supply LLC. In other words, they’ve set aside 8,500,000 shares for Kanye’s company.
Those stocks will be released as follows:
- 33.4% if $250 million in Net Sales is reached
- 33.3% if $450 million in Net Sales is reached
- 33.3% if $750 million in Net Sales is reached
If my understanding is correct then Kanye could stand to gain over $150 million in cash, shares in Gap, or a combination of both (based on 8.5 million shares x current shares price: $20).
This is important because Kanye’s main reason for leaving Nike for Adidas was that he wasn’t receiving royalties. In an interview with Angie Martinez he explicitly says, “The new me, with a daughter, takes the Adidas deal because I have royalties and I have to provide for my family.”
There’s also a Covid angle
More than two dozen retailers such as Brooks Brothers and J.C. Penny have been forced to file for bankruptcy due to the coronavirus. Gap, on the other hand, has gone all in on their mobile platform and is capitalizing on the trend towards casual clothing with their Athleta line.
Covid also gave Gap the opportunity to close their less profitable store locations without the usual negative press it would have brought. As the pandemic goes on we could see more retail bankruptcies which leaves more market share and less competition for those that survive.
To wrap it all up, I think there’s a few reasons to be excited about Gap. From a technical analysis, the chart was a clear buy signal. Fundamentally, their focus on digital and active apparel looks like it will pay off. Lastly, the YZY Gap collection is expected to release in Fall 2021. Until then, all I can say is, “Thank you, Yeezus.”
