Home improvement retailing giant Home Depot Inc (HD) has bounced back during the past week, as Wall Street enjoyed a four-session winning streak.
HD stock has a chance to extend this rally into next week when Home Depot steps into the earnings confessional on Tuesday. While Home Depot has a strong fundamental backdrop, guidance will be the key for HD stock’s continued well-being.
Analysts are expecting a solid performance out of Home Depot, with earnings projected to come in at $1.10 per share, up 10% from the same quarter last year. Revenue is expected to rise 6.4% to $20.4 billion.
There are bullish murmurs, however, that Home Depot earnings will come in stronger than expected, with EarningsWhisper.com reporting a fourth-quarter whisper number of $1.12 per share. Given that Home Depot has topped the consensus estimate in most quarters for the past two years, the whisper number seems par for the course.
In fact, Home Depot stock is thick with bullish sentiment within the brokerage community. According to data from Thomson/First Call, HD stock has attracted 18 buy ratings and 10 holds, with nary a sell to be found. Meanwhile, the 12-month price target of $145 represents a healthy premium of about 21% to HD stock’s current trading range.
Options data is also quite bullish when it comes to Home Depot’s earnings. Currently, the February/March put/call open interest ratio arrives at 0.72, with calls receiving favorable attention. However, this ratio plummets to just 0.17 in the weekly February 26 series, with calls more than quintupling puts among options most affected by Home Depot’s quarterly report.
Overall, weekly February 26 series implieds for HD stock are pricing in a potential post-earnings move of about 4.4%. Based on today’s opening price, this places the upper bound at $125.09, while the lower bound arrives at $114.55. Technically, Home Depot stock has immediate support in the $119 region from its 200-day moving average, with additional support at $110. Resistance lies at $125, with HD stock’s 50-day trendline in the area.
2 Trades for HD Stock
Put Sell: With growing potential on the housing front, I would like to play calls on potentially bullish guidance from Home Depot. However, guidance has been horrendous across the board this earnings season, and a poor projection would completely scuttle HD stock. Taking a more cautious approach, the weekly February 26 $110 put sell offers a much “safer” means of profiting from Home Depot’s quarterly report.
At last check, the weekly February 26 series $110 put was bid at 47 cents, or $47 per contract. As usual, you keep the premium as long as HD stock closes above $110 when these options expire. The downside is that should Home Depot stock trade below $110 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $110 per share.
Call Spread: If you are willing to take a risk, then a March $120/$125 bull call spread has potential. At last check, this spread was offered at $1.83, or $183 per pair of contracts. Breakeven lies at $121.83, while a maximum profit of $3.17, or $317 per pair of contracts, is possible if HD stock closes at or above $125 when March options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
