Family Dollar Stores (FDO), which reports on Wednesday before the open, hasn’t missed an earnings estimate in the past 10 quarters and has shown a decline in profits just once during that period.
Analysts expect a healthy 30% increase in profits from a year ago. That may sound steep, but FDO has exceeded that gain several times in the past couple of years.
The interesting thing about Family Dollar is what it does after earnings. In three of the past four quarters, the stock surged an average of 10% on the day of the report. And the other quarter saw a big run-up before earnings hit. So FDO moves quickly around earnings, and generally in a northward direction.
On the chart, the stock has been steadily rising along the support of its 10-day moving average for the past two months. Now the shares are sitting near a six-year high. The next stop is the all-time high just above the $44 level. That leaves another 20% of room on the upside.
Despite Family Dollar’s success on the charts, we’re seeing some skepticism. Better still, this pessimism is starting to unwind, notably among options traders and short sellers.
The put/call and short interest ratios are both declining, indicating some gaining optimism that usually equates with buying pressure.
What’s more, only 42% of covering analysts rate the stock a “buy,” leaving plenty of room for upgrades.
If form holds, Family Dollar should provide a solid report next week. The company sits in the still desirable lower end of the retail spectrum where cautious consumers prefer to spend.
With strong technicals and unwinding pessimism, the future looks bright for FDO before and after earnings, so think about purchasing some call options ahead of this report.
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