Pier 1 -- a stock for December

Pier 1 Imports Inc, (PIR) is a stock in which I have invested in the last two months. It has risen nicely (I bought most at 7.62 in mid October and it is now 9.92), but the real test is in front of it. Pier 1 sells an ecclectic mix of imported home furnishings, tableware, linens, gifts and other items that sometimes defy classification. It had fallen on hard times a few years back, but it has rejuvenated its stores and seems to be on the road to stardom again. Beginning today, however, the company needs to do very well with its seasonal sales to really re-enter the ranks of the successful. Right now the stock is selling at roughly 14 times estimated earnings for the next twelve months. The company will report third quarter results on December 13, but it is the next quarter that truly matters. According to the estimates, PIR will earn 41 cents out of an annual total of 71 cents during the current quarter. Pier needs to outperform during that quarter to get the estimates for the year raised and to convince the market that growth has returned to these stores.

Another reason that I like PIR is that it has high option premiums. Buying the stock and writing the March 11 calls in the area of 90 cents will reduce the downside risk and will still allow a gain of roughly 75% on an annualized basis over the next four months if the stock is successful. There are many other option strategies strategies for PIR as well.

Perhaps the main reason that I like the stock, however, is that I have seen the change in the Pier 1 stores myself. The merchandise selection is much better than it was during their time of troubles. The stores seem more crowded (about the most annecdotal bit of evidence anyone will ever offer), and the market for less expensive items like those at Pier 1 should be fine at the moment. My extimate is that the company will surprise on the up side when the Christmas season report comes in. We could see a big rise in this stock in the next six months.

One last note: Pier 1 is not a stock in which to put the mortgage money. It has a high risk and the possibility of a high reward. It can also go down rather rapidly if things do not work out well.

Disclosure: as noted above, I am long the stock and have numerous option positions as well.