Nordstrom, Inc. (JWN) is scheduled to step into the earnings limelight after the close tomorrow, and the upscale retailer is facing a fair amount of negativity heading into the report. With the holiday shopping season just around the corner, mixed reports on November same-store sales for the first week in November aren’t helping matters any.
That said, JWN stock has shown strong fundamentals and price action this year, indicating that this negativity could be an opportunity for savvy options traders.
Digging into the numbers, Wall Street is expecting Nordstrom earnings of 71 cents per share in the third quarter. However, according to EarningsWhisper.com, some expectations may be a bit higher, with the whisper number for Nordstrom earnings coming in at 74 cents per share. Given that JWN has bested the consensus estimate in each of the past five quarters, however, the whisper number may not be too far out of line.
Taking a closer look at the brokerage bunch, we find a considerable bearish sentiment. Specifically, Thompson/First Call data reveals that 17 of the 28 analysts following JWN stock rate the shares a “hold” or worse, compared to 11 “buy” ratings. Additionally, the 12-month price target of $72 represents a meager premium of only about 2% to Tuesday’s close at $70.48, leaving plenty of room for potential upgrades should Nordstrom beat expectations.
Pessimism also is prevalent on the options front. Taking a look at the front two months, puts are twice as popular as calls, with the put/call open interest ratio arriving at a reading of 2.02. This ratio rises even higher when we zero in on the front-month November series, coming in at 2.50. Peak put open interest totals 7,138 contracts at the Nov $70 strike, while another 6,149 contracts reside at the Nov $72.50 strike.
Click to Enlarge Overall, November implieds for JWN are pricing in a potential post-earnings move of about 5.8%. This places the upper bound near $74.07, while the lower bound lies at $65.93. As such, an upside move could push JWN stock past overhead resistance near $74, while a downside move puts the stock in danger of breaching support at the $66 level.
Options Trade on JWN Stock
Unless sales are horribly out of line with the norm, the recent slide in JWN stock indicates that Wall Street has already priced in the potential of weak sales. With the bar lowered sufficiently, Nordstrom should have little trouble in beating expectations once again. As such, traders looking to buck the trend might want to consider a contrarian play by entering a Dec $70/$72.50 bull call spread.
As last check, this spread was offered at 71 cents, or $71 per pair of contracts. Breakeven lies at $70.71, while a maximum profit of $1.79, or $179 per pair of contracts, is possible if JWN stock closes at or above $72.50 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
