Retailers join the earnings parade this week, with Target (TGT) taking the stage bright and early Wednesday morning. Unfortunately for TGT stock holders, the outlook isn’t very pretty.
Retailing giant Walmart (WMT) has already warned that Black Friday sales could be rather bleak this year, and Target has announced an additional 13 U.S. store closures for 2016.
By the numbers, Target is expected to post a third-quarter profit of 86 cents per share on revenue of $17.57 billion. In the year-ago period, Target earned 54 cents per share on sales of $17.73 billion.
Historically, Target has fared well in the earnings confessional, meeting or beating Wall Street’s expectations in every quarter for the past five years. Guidance, however, has been a different matter entirely.
Turning to sentiment, expectations appear to be a bit high for Target earnings. Target’s whisper number comes in at 89 cents per share — three cents above the consensus view.
But the bullish sentiment ends there, however. Data from Thomson/First Call puts Target stock at an unimpressive 11 “buy” ratings compared to 15 “holds” and one “underperform” rating. Additionally, the 12-month consensus price-target of $84 represents a meager premium of roughly 18% for Target stock.
Options traders are also placing betting big against TGT heading into this week’s earnings report. Currently, the November/December put-call open interest ratio for TGT rests at 1.24, with puts easily outnumbering calls among options set to expire within the next two months. This ratio jumps to 1.41 when we look at just November’s open interest configuration.
Click to Enlarge Overall, November series implieds are pricing in a potential post-earnings move of about 6.4% for TGT stock. This places the upper bound at $76.62, while the lower bound lies at $67.38.
Technically, a rally would still leave Target stock below resistance at its 50-day moving average, making a case for fading the stock following any post-earnings rally.
Meanwhile, a selloff would put TGT at a fresh 52-week low and leave the shares staring up at potentially stiff resistance at $70.
2 Trades for Target Stock
Put Spread: Pessimism toward an underperforming stock is to be expected, and TGT has been underwhelming for a while now. What should be worrisome for Target stock holders is the lingering bullish sentiment, which could be a sign that the shares have further to fall before hitting bottom.
Traders siding with the bears might want to consider a Dec. $67.50/$70 bear put spread. At last check, this spread was offered at 80 cents, or $80 per pair of contracts.
Breakeven lies at $69.20, while a maximum profit of $1.70 ($170 per pair of contracts) is possible if TGT closes at or below $67.50 when December options expire.
Call Sell: If betting directly against Target stock isn’t your style, you might consider entering a Nov. $80 strike call sell position. Such a trade is especially useful if you already own TGT, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $80.
At last check, this option was bid at 15 cents, or $15 per contract. A sold call allows you keep the premium as long as TGT closes below $80 at expiration.
On the downside, if Target stock rallies above $80 prior to expiration, you could be forced to provide 100 shares at TGT’s current market value for each call sold, which could be quite costly if you do not have enough Target stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
