In the past week, we’ve seen the following stocks cut guidance or report a major dud on earnings:
- SCSS down 19% on Monday after pre-announcing weaker sales and earnings, noting that “From Cyber Monday through the end of December, however, sales trends fell below internal goals…We expect this challenging environment to continue in 2014 and are planning accordingly.”
- TCS down 15% on Wednesday after reporting weaker-than expected traffic trends in the 3rd quarter and similar expectation for the 4th.
- BBBY down 12.5% today after missing earnings and cutting full-year guidance after the close yesterday.
Granted, that is a relatively diverse set of companies, but all indicate weaker-than-expected demand for large household items. While Home Depot does not have much in common with any of those companies individually, we do think it’s an early sign that consumer spending might turn out weaker than expected in 2014.
Moreover, as we noted in Tuesday’s Morning Word, the housing-related stocks have gotten off to a weak start in 2014, with XHB experiencing a nasty breakdown this week. Interest rates are still near 2.5 year highs, and the Fed shows no signs of slowing the tapering process.
Our overall concern about Home Depot was summed up nicely by Dan in our most recent Q3 earnings cheat sheet:
The stock’s strength today is clearly 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.
Given the earnings reports we’ve seen so far, that Bull Case is getting more and more fragile.
Finally, the technical situation for HD looks precarious after another rejection of the stock in the 81-82.50 area:[caption id="attachment_34575" align="alignnone" width="600"] HD daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
A breakdown to start the year could bring the 200 day moving average around 77 into play.
TRADE: HD ($81.44) Bought the Feb22nd 80 Put for $1.09
-Bought 1 Feb22nd 80 Put for 1.09
Break-Even on Feb22nd Expiration:
Profits: Below 78.91, profits are 1 for 1 with the stock
Losses: Up to 1.09 between 78.91 and 80, max loss of 1.05 above 80
Trade Rationale: Implied volatility in Home Depot is at a multi-year low, offering a good opportunity to buy options with a directional view. If HD trades down below $80, we might look to adjust the structure to take in some profits. If the stock makes a new all-time high, we also might look to exit the trade at a loss, depending on the time left until expiry.