Consumer discretionary stocks as a whole look good for further gains in coming months. While I am not looking to lean out of any windows in these likely late innings of the current cyclical bull markets, particularly not in any cyclical themes, I would be fighting a trend by not respecting the possibility that at least marginally higher levels are possible.
Part of the consumer discretionary sector are the retail stocks, and one such name, Williams-Sonoma (WSM), is scheduled to report its fourth-quarter earnings Wednesday. More specifically, WSM earnings for the fourth quarter are expected to come in at $1.36 per share on revenue of $1.43 billion, which is roughly in line with last year’s EPS of $1.34 on revenue of $1.41 billion.
Williams-Sonoma hasn’t made much headlines as of late, but brokers have updated their views on WSM stock over the past two months leading up to this week’s announcement. Merrill Lynch, for example, has a “neutral” rating on WSM stock, but a price target of $66, which is roughly 10% higher from last Friday’s closing price. Then there is Credit Suisse, which also has a “neutral” rating on the company but a $60 price target, right around where the stock currently trades.
Of course, those price targets and views are often more with a six- to twelve-month time horizon in mind, which means that for the more active investor and trader, these comments need to be taken with a grain of salt (although not completely ignored).
WSM stock has a tendency to jump or slump significantly after its earnings announcements, making it a good stock to look for trades once the initial reaction to the results has run its course.
Through the multiyear lens, WSM stock continues to hold up well, and after overcoming significant long-term technical resistance in early 2013, Williams-Sonoma has spent the better part of the past six to eight months consolidating this breakout move. On a relative basis, WM stock is also showing strength vs. most of its closest competitors, and that too should be kept in the back of our minds when we observe the initial reaction after Williams-Sonoma earnings results are out on Wednesday.
Technical resistance level: On the daily chart, WSM stock last week overcame diagonal resistance dating back to last summer, but now sits right at lateral resistance around the $60 mark, which is my first level of interest. Very simply, a meaningful push past the $60 level following earnings could get this stock moving into the mid- to high $60s in coming weeks.
Technical support level: Should WSM stock plunge after the company’s earnings report, a first level of support comes in at the confluence area made up of WSM’s 50-, 100- and 200-day simple moving averages, currently around the $56 to $56.50 area. However, this also would push the stock right back into the middle of its multimonth trading range, thus essentially putting it in neutral territory where I would see little reason to touch the stock.
The best trade in WSM stock after earnings (for now) looks to be setting up to the long side if the stock can break past the $60 level. If Williams-Sonoma shares falter after earnings, they should be best left alone, barring a break below the $51 area, which could set it up on the short side.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.