Keeping with the theme of the haves and have-nots in retail stocks from the MorningWord earlier, I wanted to highlight a bunch of earnings due out tomorrow before the open. First a couple of haves.
The Home Depot (HD) is scheduled to report tomorrow before the open. The options market is implying about a 3% move in either direction on Tuesday, which is essentially in line with the 10-year average one-day post-earnings move, but a tad rich to the average over the last four quarters of about 1.75%.
Shares of HD are up 17% on the year, and up 31% from their 52-week lows made just prior to the election. As my friend Carter Braxton Worth of Cornerstone Marco likes to say, “draw the lines any way you like, but to my eye” … the incline looks fairly steep, and while there is no overhead technical resistance, the stock has healthy near-term support between $145 and $150:
So What’s the Trade?
After such a steep run, it can be paralyzing in a stock like this into an event. Nervous existing longs and curious new entrants should look to define risk, mimicking long stock to the upside as much as possible while limiting exposure in case the stock corrects. This one defines risk to much less than the implied move to the downside, targets the implied move and more on the upside, and has a breakeven not much higher than the stock itself:
Defined Risk Long / Stock Alternative
In lieu of 100 shares of HD (157) Buy the May 155/165 call spread for 3.50
- Buy 1 May 155 call for 3.70
- Sell 1 May 165 calls at .20
Breakeven on Friday: 158.50 (1.50 higher than the stock)
Losses limited to 3.50 (implied move is nearly $5)
Gains of up to 6.50 if the stock is 165 or higher. Gains capped at 6.50 but that is a move much higher than the implied move. Those that want unlimited gains on a massive gap higher can just buy the 155 call.
Rationale – If the stock corrects, 150 is an obvious level of support. This trade would only lose 3.50 on a move to 150, rather than $7 in the stock. On the upside if the stock goes higher this will act much like stock above 158.50 all the way to 165. The 1.50 higher entry on the stock is the cost of defining risk to just 3.50. Unlimited opportunity above 165 costs just .20 more by not selling the 165 calls.
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TJX Companies (TJX) is scheduled to report tomorrow before the open.The options market is implying about a 4% move in either direction on Tuesday, which is rich to the 10-year average one-day post-earnings move of a little less than 3%, and well above the average over the last four quarters of about 1.8%.
Shares of TJX are up 3% on the year, bucking trends in the department stores, but the combination of eCommerce trends and off-price bricks and mortars stores like TJX are likely at the heart of their woes. If we are playing a little game of connecting the dots, the stock has held its long-term uptrend like a boss and has healthy near-term technical resistance at $89/90ish:
With expected high single digits eps and sales growth, the stock trading very near 20x is not exactly on the bargain rack, but I guess that all depends if we see outperformance and confidence in trends that contradict those of the dept stores.
So What’s the Trade?
Similar to HD, those long the stock or those looking to be long should look to do so with defined risk, leabing room for more upside but protecting against a sharp correction
In lieu of 100 shares of TJX (77) Buy the June 75/85 call spread for 3.40
- Buy 1 June 75 call for 3.60
- Sell 1 June 85 call at .20
Breakeven on June Expiration: 78.40 (1.40 higher than the stock)
Losses limited to 3.40 (implied move out to June is 4.50)
Gains of up to 6.60 if the stock is 78.40 or higher. Gains capped at 6.60 but that is a move much higher than the implied move.
Rationale – If the stock corrects, 70 is in play. This trade would only lose 3.40 on a move to 70, rather than $7 in the stock. On the upside if the stock goes higher this will act much like stock above 78.40 all the way to 85. The 1.40 higher entry on the stock is the cost of defining risk to just 3.40. Unlimited opportunity above 85 costs just .20 more by not selling the 85 calls.
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Dick’s Sporting Goods (DKS) is scheduled to report Tuesday before the open. The options market is implying about a 7.5% move in either direction on Tuesday, which is rich to the 10-year average one-day post-earnings move of 5.3%, but basically in line with the average over the last four quarters of about 7.7%.
Shares of SKS are down nearly 10% on the year, and down about 23% from their 52-week highs made in November. The stock got creamed on Friday, down 8% shortly after the opening, but spending most of the day rallying from those levels to close on the high of the session but still down 4%. The cause of the gap was a computational error on an impairment charge. If they can hey their act together on the accounting front the stock screens as pretty cheap with current estimates calling for 19% eps growth on 11% sales growth in the current fiscal year, the stock trading at about 12% that expected eps growth.
With the stock at $48 it is trading very near the exact mid-point from the 2016 low near $33 and the 2016 high of $63. Your guess is as good as mine which way this one breaks:
So What’s the Trade?
This stock is not faring well lately and risk to the downside is still considerable. For those long the stock or looking to press its weakness on an outright basis a put spread makes sense:
Bearish/ Hedge
DKS (48) Buy the June 45 puts for 1.10
Breakeven on June expiration: 43.90
Gains unlimited below 43.90 (or as a hedge stock has no losses below 43.90)
Losses of up to 1.10
Rationale – if DKS stock gets swept up in some of the carnage of other retailers things could get ugly. This June put protects against disaster for longs and is a defined risk press for those looking for that sort of thing. The stock is already down a bunch into the print, so it could obviously go big the other way on a surprise. In either case the move would likely be far greater than the 1.10 risked here as a hedge or a press.