$HD Q3 Earnings Cheat Sheet

by Enis November 18, 2013 9:43 am • Commentary

Event:  HD reports its fiscal Q3 earnings tomorrow morning before the open.  The options market is implying about a 3.5% one day move, which is slightly above the 4 qtr avg of about 3.25% and the 8 qtr avg of about 2.5%.

Sentiment:  Wall Street analysts are somewhat positive on the stock, with 16 buys, 11 holds, and only 1 sell, and an average 12 month price target of around $85.50.  Short interest is at just 0.9% of float, and HD is up 29% so far in 2013.  The stock has more than doubled in the past 2 years.

Options Open Interest:  Open interest is skewed towards puts, at around 1.2 to 1 puts vs. calls.  The past 1 month volume has been slightly skewed towards puts, at a ratio of about 1.1 to 1.  However, the bulk of the open interest in puts is at much lower strikes, which are not in play.  The weekly 77 calls have over 17k of open interest.  Further out, the Jan14 80 calls also have over 80k of open interest, while the Jan14 72.50 put line has around 10k.

Price Action / Technicals:  Like so many mega-cap stocks in 2013, HD broke out to a new all-time high earlier this year, above the $70 high it set in 1999-2000.  Since that spring breakout, the stock has held above the $70 level:

HD monthly chart, Courtesy of Bloomberg
HD monthly chart, Courtesy of Bloomberg

On the daily chart, the 200 day moving average has acted as support on several occasions in the last 2 months:

HD daily, 200 day ma in black, Courtesy of Bloomberg
HD daily, 200 day ma in black, Courtesy of Bloomberg

The stock’s bounce last week has taken it up to near the highs of the year, in the 80-81.50 area, from where the stock was rejected in May, June, July, and August.  The all-time high is $81.56.  $75 is obvious support.

Volatility:  HD 30 day implied volatility (red) has been in a relatively tight range over the past year:

HD 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro
HD 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro

Implied vol has been between 15 and 25 for most of the past year.  30 day realized volatility has been between 13 and 25, though most of the time it has been below 20.  Expect implied vol to head back down to the high teens after earnings.

Our View:   HD stock stalled at the same time that interest rates started moving higher in mid-May.  Since then, concerns over the housing market slowing have persisted, even as the broader stock market has continued to rally.  Housing-related stocks, as represented by the XHB ETF, have looked quite similar to HD, generally flat since mid-May.

Dan put on a HD put calendar trade on October 11th, with the following thought:

The stock’s strength today is clearing bucking the trend of broad retail weakness, but my sense is that rates will continue to stay bid, regardless of Yellen’s appointment to be the next Fed Chairwoman, and that a continuation of the government shutdown will weigh on consumer confidence all adding up to softening activity in the housing market.  But the BULL CASE is predicated on the notion that there remains a tremendous backlog of home improvement that does not rely on new and used home purchases.  This is not a trend that I would want to be short in the long run, but like the idea of setting up to own Dec near the money Puts for their Q3 results expected Nov 19th.

With HD reporting tomorrow morning, and LOW reporting Wednesday morning, we’ll have a much better sense for just how much the softening housing market has affected home improvement demand after this week.