by Joseph Hargett | March 20, 2014 9:59 am
Walgreen (WAG) has been on fire during the past year, with WAG stock up more than 50% since March 2013, and the company will look to keep that momentum going next Tuesday. That’s when we’ll get a look at Walgreen earnings.
Thanks to an unusual bump since the beginning of the year, WAG stock is now trading in multiyear high territory, leading some analysts to wonder how much longer the rally will last. That question is even more hurried with earnings down the pike.
Turning to next week’s report, Walgreen earnings are expected to come in at 92 cents per share, down 4 cents per share from the year-ago period. Revenue, meanwhile, is seen rising almost 5% to $19.62 billion. That said, some analysts have set their sights higher, with EarningsWhisper.com reporting a whisper number of 95 cents per share for Q2 Walgreen earnings.
This optimism is prevalent in the brokerage community. Specifically, Thomson/First Call reports that WAG stock has attracted 16 “buys,” 10 “holds” and just one “sell” ratings. That said, there could be a round of ratings or price-target changes on tap for WAG, as the stock is trading less than 2% away from the 12-month consensus price target of $68 per share. Next week’s earnings report could be the catalyst for such a shift.
Judging from recent activity, short sellers appear to be rather concerned that WAG stock is set to extend its rally. During the most recent reporting period, WAG short interest plunged by 13% to 20.7 million shares. Only about 2% of WAG’s float is now sold short, so the potential for a short-squeeze is very minimal, but the drawdown in WAG short interest ahead of an earnings report hints at expectations for additional gains, especially with the stock trading near multiyear highs.
Options traders also appear to be expecting gains for WAG stock. More specifically, the wealth of call open interest in the weekly March options hints at a post-earnings rally. Currently, there are 40,398 calls open in the weekly March 22 and March 29 options series, compared to put open interest of 23,047 contracts. The result is a weekly March put/call open interest ratio of 0.57, with calls nearly doubling puts in the last two weeks of March.
Taking a closer look reveals that peak call open interest totals 11,587 contracts at the out-of-the-money weekly March 22 67.50 strike. Another 6,803 contracts are open at the in the money March 65 call, while 5,471 contracts reside at the out-of-the-money March 70 call.
Despite the apparent enthusiasm, March implieds are only pricing in a potential post-earnings move of about 1.3%. This places the upper bound at $67.50, while the lower bound lies at $64.50.
Click to Enlarge Technically speaking, WAG stock is off its recent highs near $70, with short-term resistance emerging near $68. Additionally, the stock’s 10- and 20-day moving averages are on the verge of a bearish cross, hinting at potential short-term weakness. Still shares are perched just above support at $66, which is home to WAG’s rising 20-day MA.
The safest play for those traders looking to play WAG stock ahead of earnings might be to go with the flow and follow the bulls’ lead. As such, an April 67.50/70 bull call spread could fit the profile. This spread currently is offered at 79 cents, or $79 per pair of contracts. Breakeven lies at $68.29, while a maximum profit of $1.71, or $171 per pair of contracts, is possible if WAG stock closes at or above $70 when April options expire.
An alternate strategy, if you are concerned about limited upside for WAG stock, is to consider a put sell position. For instance, an April 60 put sell well below the expected post-earnings move for WAG, making it a prime target for such a strategy.
The April 60 put was last bid at 26 cents, or $26 per contract. If WAG stock closes above 60 when April options expire, you keep the $26 premium. However, if Walgreen trades below $60 ahead of April expiration, you could be assigned 100 shares for each sold put at a cost of $60 per share.
While WAG stock should hold above $60 through expiration given the stock’s current trend, it is always best to be aware of the potential risks ahead of time.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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