Retail stocks are in focus following earnings results from Walmart (WMT) and Home Depot (HD) on Tuesday.
Home Depot reported a profit of $1.72 a share, which matched Wall Street’s estimate, while revenue of $24.8 billion topped forecasts for $24.7 billion. The company also raised its full-year guidance, as July same-store sales were up over 8%. Shares have traded to an all-time high of $123.
Walmart missed estimates by 4 cents per share after reporting a profit of $1.08 a share. However, revenues of $120.2 billion topped estimates for $119.7 billion. Although the bottom line beat was impressive, the company lowered its current quarter earnings to 93 cents to $1.05 a share and its 2016 outlook to $4.40-$4.70 a share. Analysts were looking for $1.08 a share in the current quarter and $4.77 a share in 2016.
The one company I’m watching this week, as far as earnings go, is Hewlett-Packard (HPQ). The suits-and-ties are looking for a profit of 85 cents a share on revenue of $25.5 billion. The high estimate is at 87 cents a share, with the low estimate at 80 cents. In other words, the headline could read as a 2-cent beat or a 5-cent miss.
HPQ topped forecasts by a penny in the two previous quarters and matched estimates in the two prior quarters. However, revenues have fallen short of estimates in the past three quarters, although there was a beat in the year-ago quarter. This makes judging the recently ended quarter a little tough, as back-to-school sales could have helped its results.
The technical picture for HPQ is showing continued weakness, however, with shares hitting a fresh 52-week low of $28.21. The major moving averages are sloping lower, and it appears that there is risk to $27-$25 on an earnings miss or lowered outlook. A blowout quarter could lead to a rebound to $30 or higher and a test to the 50-day moving average, but most of the research so far is showing that put options might be the way to trade HPQ.
The weekly and regular August option chains are available to trade, but they expire relatively soon. While the weekly September options are also available, the regular monthly options would provide more time for a trade to play out.
The Sep $27 puts, priced at 65 cents, could be used by bearish traders to play continued weakness and a test to the mid-$20s. To break even, technically, shares would need to be at $26.35 by mid-September. A move to $26-$25.75 would double these options, depending how fast that happens.
Bullish traders could target the Sep $30 calls at 50 cents for a rebound to $30 or better. To break even, technically, shares would need to be at $30.50 by mid-September. A push past $31 would double these options, depending on the pace of the action.
The two aforementioned options together would create a strangle option trade with a cost of $1.15. The setup would require shares to be below $25.85 or above $31.15 by mid-September to break even. This would require a 10% move in the stock from current levels.
Shares moved less than $1 higher after May’s results, but they tanked nearly $4 from $38.49 to $34.67 following February’s update. Last November, shares moved from $37.63 to $39.16 and, in August 2014, the stock jumped from $35.12 to $37 following earnings.
With the option premiums a little rich, the better trade might be to sell the call and put option to collect the premium. This is a more complex option strategy and requires more cash to cover the stock and brokerage approval to execute the trade. If shares are above $30 or below $27 by mid-September, one would have to sell shares that they don’t own at $30 or have them put to them at $27. This is what selling naked options looks like.
With all of that said, I don’t like any of the risk/reward setups on HPQ going into earnings, so I will likely remain on the sidelines.
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