Though earnings season is largely over, this week’s schedule is dotted with a number of interesting names that cover many sectors. The two main groups are food-related stocks — Campbell Soup (NYSE: CPB), Hormel (NYSE: HRL), HJ Heinz (NYSE: HNZ) — and a variety of retailers — AutoZone (NYSE: AZO), American Eagle (NYSE: AEO), Costco (NASDAQ: COST), and Tiffany (NYSE: TIF).
We’re going to stick with the retail sector for our next earnings trade for options trading investors with electronics store hhgregg Inc. (NYSE:HGG), though we’re looking at the company in a bearish light. HGG reports earnings on Thursday before the open, with analysts expecting a modest 16% increase in EPS from a year ago. The company has a mediocre record of beating earnings estimates, with four misses over the past three years. Performance after recent reports has been mixed at best, with the stock dropping 9.9% and 7.8% in the week following the past two reports.
On the chart, HGG has been a major underperformer since December, dropping more than 50% at one point in its decline. Though the stock recently rallied off the 12 level, it has been unable to overcome the staunch resistance of its 50-day moving average, a trend line it has closed above just once in the past five months.
Sentiment is largely negative toward HGG, but that’s to be expected given its recent price performance. Options traders are showing a preference for calls, though, as open calls are swamping open puts in the June series. So there’s room for some optimism to unwind into more selling.
Electronics retailers have had a rough time of late, especially HGG’s major competitor Best Buy (NYSE: BBY), which is down nearly 8% for the year. With plenty of skepticism about job growth and the economic recovery tainting consumers’ buying decision about big-ticket items such as TVs and major appliances, don’t look for HGG to turn it around with this week’s earnings report.
Because spreads on HGG options are a bit on the wide side, we recommend going a little deeper in the money. Buy the HGG June 14 Put for around $1.50.
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