Dollar General Corp. (DG) Should Ride With the Bulls

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Dollar General Corp. (NYSE:DG) is having a stellar year, with DG stock up more than 25% since the start of 2016.

Dollar General Corp. (DG) Could Be a Stock to Bet Your Bottom Dollar OnThe shares have a chance to add to that lead this week, as Dollar General heads to the earnings confessional to release its second-quarter earnings report.

With DG stock hovering near technical support and oversold levels, Dollar General options traders should take a serious look.

Currently, Wall Street is expecting second-quarter earnings to rise nearly 15% year-over-year to $1.09 per share, with revenue seen advancing 7.9% to $5.5 billion. Though the company sports smaller sized stores, Dollar General competes almost directly with retailing juggernaut Wal-Mart Stores, Inc. (NYSE:WMT).

While Walmart’s venture into the small-store market largely failed — and ended with Dollar General snapping up about 40 Walmart Express locations — the company’s recent earnings report hinted at product pricing moves that could impact DG stock’s guidance.

That said, analysts don’t seem to be too worried about Walmart’s competition, with EarningsWhispers.com projecting a whisper number of $1.11 per share — two cents better than the consensus.

What’s more, the brokerage community as a whole has a bullish outlook on DG stock. For instance, Thomson/First Call data states that Dollar General has received 19 buy ratings, seven holds and no sell ratings. The 12-month price target of $99.71, meanwhile, represents a healthy premium of about 9.8%.

Turning to data on short selling, there were 5.65 million shares of DG stock sold short as of the most recent reporting period. Representing a mere 2.17% of DG’s total float, this figure is hardly worth noting. However, it is worth pointing out that short interest plunged by 22% in the most recent period, indicating that short sellers are abandoning Dollar General in droves — which could be a sign that bears are concerned about a post-earnings rally for DG stock.

DG Stock
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Options traders, on the other hand, remain skeptical of DG stock’s post-earnings prowess. At last check, the August/September put/call open interest ratio rested at 1.02, with puts and calls in near parity. This ratio dips only fractionally to 1.00 for the weekly August 26 series.

Overall, weekly August 26 series implieds are pricing in a potential post-earnings move of about 4.2% for DG stock. This places the upper bound at $94.85 and the lower bound at $87.15. Key short-term support for DG lies at $90, with $85 providing a potential backstop, while the $100 mark is the biggest technical hurdle for DG, though the shares will have to power past short-term resistance at $95 first.

2 Trades for DG Stock

Call Spread: Dollar General has a history of moving higher in response to quarterly earnings reports. This coupled with the fact that the shares are hovering near technical support and in oversold territory could provide the impetus for a post-earnings rally. As such, traders looking side with the bulls ahead of DG’s report might want to consider a Sept $92.50/$95 bull call spread.

At last check, this spread was offered at $1, or $100 per pair of contracts. Breakeven lies at $93.50, while a maximum profit of $1.50, or $150 per pair of contracts, is possible if DG closes at or above $95 when September options expire.

Put Sell: On the other hand, those with a bullish-to-neutral bias on DG might consider a weekly Aug 26 series $85 put sell position. At last check, the August $85 put was bid at 36 cents, or $36 per contract.

The upside to this put sell strategy is that you keep the premium as long as DG stock closes above $85 when these options expire at the end of this week. The downside is that should DG trade below $85 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $85 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/08/dollar-general-corp-bet-bottom-dollar-dg-stock-rally/.

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