Buy Costco Calls and Enjoy the Steady Rise

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With earnings season mostly in the rear view mirror, the pickings are getting mighty slim for options trading investors. One sector that still has a respectable presence, however, is the retail space. We’ll see reports from a number of different retail areas, including grocers like Kroger (NYSE: KR), office supplies like Staples (NYSE: SPLS), auto parts like AutoZone (NYSE: AZO), pet stores like PetSmart (NASDAQ: PETM), and apparel shops like Foot Locker (NYSE: FL) and Ascena (NASDAQ: ASNA), the new name of Dress Barn.

Another well-represented area is the discount warehouse retailer, with both Costco (NASDAQ: COST) and Big Lots (NYSE: BIG) reporting. Let’s take a closer at COST, which reports on Wednesday before the open. Analysts expect the company to show a modest 11% increase in profit growth from a year ago. The whisper number matches the analyst number, which shows more modest expectations after having exceeded the analyst figure for the past three quarters.

COST has a mixed record of beating earnings estimates, having a .500 batting average (three beats, three misses, and two meets) over the past two years. What’s more, the stock doesn’t tend to exhibit exaggerated moves following earnings. If anything, post-earnings activity tends to match the pre-earnings trend.

And that’s why we like COST beyond just an earnings play. Frankly, we don’t expect earnings to make a huge impact. But we don’t expect them to get in the way of an uptrend that has covered more than 35% since August. The stock is currently enjoying a strong bounce off its 50-day moving average, a trend line that supported a similar pullback earlier this month.

Costco Chart

Costco Stock Chart

On the sentiment front, the put/call ratio has spiked to an annual high, probably in reaction to last week’s pullback. With the stock bouncing higher, look for that brief bout of pessimism to unwind to the stock’s benefit. And just half the covering analysts rate COST a “buy,” leaving plenty of room for upgrades, especially if earnings don’t disappoint and the stock moves to take out the 75 level to extend into all-time high territory.

As we said, don’t count on the stock popping higher after earnings. Instead, look for the rally to continue on strong fundamentals and unwinding pessimism. Give the move some extra time by going out a month on your option play. Buy the COST April 75 Call for around two bucks.

 

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Article printed from InvestorPlace Media, https://investorplace.com/2011/02/buy-costco-calls-big-fl-petm-azo/.

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