Make This Trade on DG Stock Before Earnings

Options are a great way to harness a potential rally

   
Make This Trade on DG Stock Before Earnings

Discount retailer Dollar General (DG) has enjoyed a considerable amount of success during the past several years. The company’s low-cost offerings have struck a chord with budget-minded consumers, driving strong sales growth for its chain dollar stores. DG stock, however, has struggled a bit recently, but tomorrow’s fourth-quarter earnings report could be the breakout catalyst that investors are looking for.

DollarGeneral Make This Trade on DG Stock Before EarningsFor the record, Dollar General earnings are expected to come in at $1.01 per share for Q4, with revenue seen rising roughly 10% year-over-year to $4.62 billion. For the full year, Wall Street believes Dollar General raked in $17.63 billion on earnings of $3.20 per share of DG stock.

Dollar  have posted strong revenue during the past three quarters, averaging double-digit growth during the latter half of fiscal 2013.

The strong performance hasn’t been lost on Wall Street, with Thomson/First Call reporting that the brokerage community has doled out 14 “buys,” eight “holds” and no “sell” ratings. However, with a 12-month consensus price target of just $65, the group is expecting DG stock to appreciate only about 10% over the next year. Revisions to this target could provide buying power.

Options activity is a mixed bag for DG stock. In the front two months (March/April), the DG has attracted call open interest of 75,002 contracts, versus put open interest of 48,864. The result is a bullishly slanted put/call open interest ratio of 0.64, with calls on the verge of doubling their put counterparts. Taking a closer look, you’ll notice that put open interest in the April series is scant, while heavy call open interest of 16,247 contracts resides at the April 60 strike.

Narrowing our focus on DG stock to the March series of options, we find a more bearish tone among short-term traders. Specifically, the March put/call open interest ratio of 0.83 reveals a much heavier concentration of put open interest. The most popular put by far is the March 55 strike, which sports open interest of 22,323 contracts. By contrast, peak March call open interest totals 17,988 contracts at the 62.50 strike.

Heading into tomorrow’s quarterly report, March implieds are pricing in a post earnings move of about 5% for DG stock. This places the upper bound near $62.10, while the lower bound lies at $55.90. As you can see from a daily chart, the lower bound lies outside of DG’s 200-day moving average but above support at $55. Meanwhile, the upper bound lies well below DG stock’s 52-week high at $63, resting just above potential resistance at $62.

031214DGChart Make This Trade on DG Stock Before Earnings

From a technical analysis standpoint, there are a couple of indicators that could hint at a Dollar General rally over the next month or so. Specifically, DG stock has held firm near support at its 50- and 200-day moving averages, indicating that investors have faith in Dollar General over the long term by buying dips.

Additionally, the stock appears to be forming an inverse head-and-shoulders pattern (shoulders defined by support at 50-day, head near $56 with support at 200-day). A positive resolution to this pattern could see DG stock breakout sharply to the upside in the coming weeks.

Options Trade on DG Stock

Those traders looking to get in on a post-earnings rally for DG, or a potential technical breakout, might want to consider an April 60/62.50 bull call spread.

At the close last night, this spread was offered at 90 cents, or $90 per pair of contracts. Breakeven lies at $60.90, while a maximum profit of $1.60, or $160 per pair of contracts, is possible if DG closes at or above $62.50 when April options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/03/dg-stock-dollar-general-earnings/.

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