Next week is another slow one for earnings, although it does present some big names, including Best Buy Co., Inc. (NYSE: BBY), FedEx Corporation (NYSE: FDX) and Oracle Corporation (NASDAQ: ORCL).
Let’s take a closer look at another S&P 500 member, The Kroger Co. (NYSE: KR), which reports on Tuesday, Sept. 14, before the market open.
Analysts expect a small drop in profits from a year ago, which would mark the fifth straight quarterly decline. What’s more, the company has a spotty record of beating the consensus earnings estimate, having missed twice in the past four quarters.
Price performance following earnings has also been spotty. Last quarter, the stock jumped 3.3% in one day, but then fell back. But in the three previous quarters, the stock plunged more than 7% on just the day of the report.
KR’s chart brings up more potential problems. After a 6% rally during the past week, the shares are now struggling to overcome their 50-day moving average.
In addition, the 20-day is ready to cross below the 50-day, a sign of intermediate-term weakness. Note in the chart below how the shares performed after the previous cross of these trendlines.
Sentiment toward KR shows optimism, and that creates some vulnerability. The put/call ratio is sinking quickly, indicating more call than put activity. And 9 of 16 analysts rate KR a “buy,” while just two caution with “sells.” That tells us that there’s plenty of optimism to unwind into selling.
We hate to rag on KR, because it’s a hometown company. But we’ve been to many Kroger stores in the past few months, and it’s become evident that nice stores with plenty of choices are not shoppers’ primary focus anymore. Low prices are what are attracting consumers, and KR cannot compete with the Wal-Marts, Costcos and Targets of the world. This will temporary crimp KR’s bottom line.
Given that September options expire next week, consider an October put to play KR’s earnings. The fairly priced KR Oct 21 Puts should give you plenty of bang for your buck.
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