Why You Should Stay Away From Buying Harley Davidson Stock

| November 2, 2011 | 0 Comments

A few weeks ago, I was sitting in the driveway watching my kids play. When, all of a sudden I heard a loud screeching noise.  I turned just in time to see my neighbor’s truck speeding around the corner.  As he whipped into his garage, I ran over to find out what was wrong.

It turns out he’d had a rotten day at the office.

After telling me the story, he said, “there’s only one way to unwind from a day like today!”

In a flash, he jumped onto his pearl-white Harley Street Glide and turned on the ignition.  Gripping the throttle, he revved the engine to an ear splitting decibel level.

Just before I lost my hearing, he screamed out, “See ya later.”

And off he went…

That’s when it hit me.  I realized maybe there’s more to this motorcycle company with its cult-like following than meets the eye.  Ever on the lookout for good investment ideas, I decided to take a closer look at Harley Davidson (HOG).

So, I quickly jumped onto my computer to read up on the company.

Here’s what I found…

Harley-Davidson is the largest and most popular motorcycle company in the world.  They’re also the oldest American motorcycle manufacturer still around today.

To be perfectly honest, Harley’s most recent quarter wasn’t too bad. Revenue grew by 5% thanks to strong sales overseas.  And earnings increased 27% to $0.81 per share.

Nevertheless… I think Harley is heading for a big fall.

Here’s why…

To start, about 30% of Harley Davidson’s annual revenue comes from overseas… mainly Europe.  This is the first sign of trouble right here.

As you probably know, Europe’s dealing with a potentially crippling debt and banking crisis.  Assuming EU leaders are able to come up with a solution, I still don’t see how Europe avoids falling into recession.

What’s more, if the EU fails to solve these issues, it could easily break apart.  A major catastrophic event like this would be devastating for European countries and the global economy.  And that means motorcycle sales (along with a lot of other things) will fall through the floor.

As if that’s not enough…

We’re seeing a slowdown in economic growth here in the US.  GDP is growing much slower than anyone expected.  Unemployment is still over 9%.  And consumer spending remains very tight.

These factors present strong headwinds for Harley moving forward.

Let’s face it… the last thing consumers are thinking about right now is plopping down $30,000 or more on a motorcycle.  They’re more concerned about putting food on the table, making rent, and paying down debt.  This is not a good environment for selling high priced motorcycles.

When second quarter earnings were released in mid-July, Harley made a sharp run up to $44.  However, investors weren’t fooled for very long.  It only took a week for investors to read between the lines and determine Harley didn’t deserve a $44 price.  Since then, Harley can’t seem to break through its short term resistance of $38.

Simply put… Harley is trading at resistance now.  And in the short term, there’s no reason to believe Harley will break through it.

Bottom line…

Harley shares are poised for a big drop.  As demand for their high priced bikes plunge, we’ll see big drops in sales and earnings.  And the stock can’t be too far behind.

How can you profit from Harley’s coming woes?  Grab some put options and ride them to big gains as Harley shares move lower.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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