Trade of the Day: Dollar Tree (DLTR)

by Jon Markman | February 18, 2014 10:15 am

During this season of earnings reports, there’s been a surprising phenomenon that is important for active traders to keep in mind.

Historically, the bulk of the move for a company reporting earnings comes in after hours and pre-market trading. Companies will typically either gap up big or gap down big at the open following a report either that morning or the prior evening.

This earnings season, though, analysts at Bespoke Investment Group note that companies have tended to gap up and then keep going up from the open to the close of trading as well.

On average, the one-day change on report days for all companies that have released earnings reports this season has been 0.84%. But breaking it down between the initial gap open and that day’s close, we see that the bulk of the gains have actually come after the initial gap during regular trading hours.

The average company that has reported this season has seen its stock gap up 0.33% at the open of trading, but then it has gone on to post an additional average gain of 0.53% from the open to the close. An outstanding example is Goodyear Tire (GT[1]), which gapped up 3.4% at the open following its Feb. 13 earnings report[2] – but then went even further, closing up 11.5% on the day.

Companies that have beaten earnings estimates have averaged a gap higher of 1.92% at the open and an additional gain of 0.42% from the open to the close. On the flip side, companies that have missed earnings estimates have gapped down by 2.98% at the open and then averaged a gain of 0.50% from the open to close.

So regardless of the initial gap (whether it has been up or down) that companies have seen following earnings reports, investors have been buying shares from the open to the close.

My recommended earnings trade for you today is Dollar Tree (DLTR[3]), which is one of the fastest-growing dollar stores in the United States and reports next week. During the recession, this discount retailer proved to be an all-weather advancer, up 375% from 2008 through 2011 — a period when the S&P 500 was down 15%, as you can see in the first chart below.

The second chart shows that shares have traded down hard since November in sync with the rest of the consumer discretionary sector and after a third-quarter earnings reports in which earnings per share (EPS) came in 2 cents under consensus expectations.

However, the stock has a history of bouncing back to new 52-week highs after disappointing the Street. And (as I noted earlier), this go-round, even those companies that have come in with a miss have tended to recover by the end of the day.

Already, they are rebounding now with potential to at least the $54 area, if not $56-$58. This is typically a great time of year for the stock, so I expect it to continue to rebound to the top of its channel. The company will report Q4 earnings on Feb. 26.

Buy DLTR at $51.55 limit, good till canceled. If filled, set initial target at $54.20 (set up to sell half there). Once that is reached, I’ll determine a final target for the remaining half; stay tuned.

Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.

Follow Jon Markman at Google+.

  1. GT:
  2. Feb. 13 earnings report:
  3. DLTR:

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