Event: JCP reports Q3 earnings Friday November 9th prior to the market open. The options market is implying about a 10% move on earnings, which is rich to the 4 qtr avg move of ~7.25%, but inline with the intra-day move of approximately the same on September 24th the day of their highly anticipated analyst meeting , and approximately inline with the 11% move lower the day after the meeting.
Sentiment: Wall Street analysts view JCP as a “Show Me” story, with 5 Buys, 12 Holds and 2 Sells and an avg 12 month price target of ~$27.80. Much of the volatility of late around any every that offers future earnings guidance is likely the result of short interest that sits slightly above 40% of the float. T
Fundamentals: JCP is probably the most controversial name in all of retail at the moment, at least as far as investors are concerned. The honeymoon period is clearly over for “not so new anymore” CEO Ron Johnson from AAPL and this could be a fairly instructive next few months for his tenure at JCP. Back in September, Johnson hosted analysts at their Dallas headquarters for a roll out of their new store format and to better explain their “always lowest price” strategy. The stock was flying high that day (up nearly 10%) on enthusiasm about the format and the very recent success of in-store offerings and the solid back to school season, until Johnson alluded to the fact that there was a bit of a post-back to school hangover, and the stock in what seemed like an instant gave back all of the gains and continued the next day down 11%. Since late Sept, the stock has continued its slide as the company has gone back on its no-coupon promise and clearance promotions, suggesting that sales could be far worse than expected causing management to renege on their previous disclosures.
Technicals: JCP has had a disappointing year by all accounts. The price action of the stock has basically mimicked the failed turnaround in the fundamentals. The stock is down 32% on the year and down ~45% from the 52 week highs. The chart is a disaster to say the least, but the lower the stock goes back towards the long term support btwn 25 and 20, the better the risk/reward becomes from the long perspective, in my opinion.[caption id="attachment_19036" align="aligncenter" width="490" caption="JCP 3 yr chart from Bloomberg"][/caption]
Volatility: Nov9 weeklies are about 115 vol with earnings the morning of expiration day. Nov regulars are about 85 vol, Dec about 58. Historically, vol is high across all months, with the previous earnings being the only higher cycle in recent memory:[caption id="attachment_19032" align="aligncenter" width="621" caption="IV vs HV from LiveVol Pro"][/caption]
Expect average vol to go quickly to the low 40’s if not the high 30’s immediately following the report, with exact collapse depending on the direction and significance of the move.
Recent Unusual Activity: Late last week one trader bought the Dec 24/20 1×2 Put Spread for .71, 12,500 by 25,000 times for .71, the break-even on this trade is 23.29,with max gain of 3.29 at $20, and the payout trails off btwn 20 and 16.71. Alos last week, a trader bought 13k of the Nov 22 Puts for .74, break-even 21.26. Both trades could be hedging long stock positions, the ratio spread in particular as we have seen this structure trade 2x since August, the first being the Nov 21/17 1×2 put spread that was closed a month or 2 after and then the Nov 27/21 traded in Sept.
My View: JCP is not your typical stock at the moment, relying on typical inputs like valuation, technicals and even current fundamentals will probably not lead you in the right direction from an investment standpoint. To own the stock here, you are going to have faith that a fairly famous CEO can orchestrate the sort of turnaround that is worthy of his reputation as the former brains behind AAPL’s retail strategy; you will have to have faith that well-heeled activists like Bill Ackman have the long term value of this company correct, and that the news flow gets incrementally better. I am not into the whole faith gig and I certainly am not a fan of applying blind faith to assets that I own, so this is not exactly in my wheelhouse as a long, but the options could provide a very interesting opportunity into an event that is not likely to disappoint from a volatility standpoint. The lower the stock goes in front of the print the more inclined I would be to play for a bounce, but again there is a lot of guess work in that. We are going to take a closer look btwn now and Thursday’s close and we will most likely be back with a trade.