Be Brave in Pier 1 Imports Inc (PIR) Ahead of Earnings

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It’s been a long time since Pier 1 Imports Inc (NYSE:PIR) stockholders had anything to cheer about.

Be Brave in Pier 1 Imports Inc (PIR) Ahead of EarningsPIR stock has been in near freefall since late 2013, with the stock shedding more than 80% of its value during this timeframe. Plagued by changing fashion tastes and a weaker consumer, Pier 1 has had trouble turning things around.

Judging by second-quarter earnings expectations, little will change when the company enters the earnings confessional after the close tomorrow night … but that doesn’t mean there aren’t opportunities for a profitable play heading into the event.

By the numbers, Pier 1 is expected to report a quarterly loss of 5 cents per share, down from a profit of 4 cents per share in the year-ago period according to Yahoo. Meanwhile, revenue is seen falling 5.3% year-over-year to $406.96 million. Over at EarningsWhispers.com, the whisper number rests at a loss of 5 cents per share, a penny better than that site’s reported consensus estimate of a loss of 6 cents per share.

On the sentiment front, there is very little in the way of bullish enthusiasm for Pier 1 ahead of tomorrow’s report. Data from Zacks reveals that only one of the 13 analysts following PIR stock rate it a “buy,” while the 12-month consensus price target of $4.45 represents a premium of only about 8.3% to yesterday’s close.

In fact, options traders are the only source of optimism for Pier 1, and even that extends only to tomorrow’s quarterly report. Currently, the front-three-month put/call open interest ratio arrives at a very bearish perch of 2.01, with puts more than doubling calls among options set to expire before the end of the year. But this ratio plunges to 0.44 for the October series — i.e., those options most affected by the Pier 1 quarterly report.

Pier 1 Stock
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Some explanation for this elevated call volume can be seen in Pier 1 short interest. As of the most recent reporting period, 22.7 million PIR shares are sold short, representing 32.6% of the stock’s total float. With the potential for volatility following earnings, it would make sense for some of these shorts to hedge their Pier 1 positions by purchasing call options.

Speaking of volatility, October implieds are pricing in a potential post-earnings move of about 13.6% for PIR stock. This places the upper bound near $4.67, while the lower bound lies at $3.55. A rally would leave Pier 1 stock short of resistance at its 50-day moving average and the $5 level, while a decline would put the shares back below support at $4 and potentially threaten support at $3.50.

2 Trades for Pier 1 Stock

Call Spread: While it may seem counterintuitive to bet bullish on a struggling stock like PIR ahead of earnings, the shares really have few other options than to move higher. It’s a risky play, but an Oct $4/$5 bull call spread does offer a potentially significant payoff in the event of a surprise move higher.

At last check, this spread was offered at 30 cents, or $30 per pair of contracts. Breakeven lies at $4.30, while a maximum profit of 70 cents, or $70 per pair of contracts, is possible if Pier 1 stock closes at or above $5 when October options expire.

Straddle: On the other hand, traders unwilling to pick a direction in the current market environment might want to take advantage of this high-volatility situation and enter a straddle. A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put in an attempt to take advantage of a greater-than-expected move from the underlying stock.

By employing a straddle on Pier 1 stock, you are betting that the company is either going to handily beat earnings expectations or miss the Street’s targets. At last check, the October $4 straddle was offered at 60 cents, or $60 per pair of contracts. Breakeven for this trade lies at $4.60 on the upside and at $3.40 on the downside.

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/2016/09/pir-stock-pier-1-brave/.

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