It’s retail week on Wall Street, with a slew of retailing heavyweights slated to step into the earnings confessional this week, including Target Corporation (NYSE:TGT), Home Depot Inc. (NYSE:HD), Lowe’s Companies (NYSE:LOW) and Wal-Mart Stores, Inc. (NYSE:WMT).
On Friday, I drilled down into Walmart’s earnings prospects, and today I am following up with the company’s biggest stateside rival, Target.
Target earnings for the first quarter are slated to come out before Wednesday’s opening bell. Currently, Wall Street is anticipating a profit of $1.03 per share, a figure that is up nicely from earnings of 70 cents per share in the year-ago period. Revenue, however, is seen limping higher by just 0.2% to $17.09 billion.
For its part, Target has set its first-quarter guidance at between 95 cents and $1.05 per share, placing the Street’s expectations near the high end of the spectrum. What’s more, expectations may even be higher than reported, with EarningsWhisper.com placing Target’s whisper number at $1.06 per share.
But elevated whisper numbers are about the extent of Wall Street’s bullish sentiment for Target.
According to data from Thomson/First Call, TGT stock has attracted 18 “hold” or worse ratings, compared to 10 “buys.” Additionally, the 12-month consensus price-target of $79.50 represents a nearly nonexistent premium of just 1.9% for Target.
Options traders are also placing bets against TGT heading into this week’s earnings report. Currently, the May/June put/call open interest ratio for Target stock rests at 1.08, with calls and puts in near parity. This ratio balloons to 1.78 when we look at just June’s open interest configuration, indicating that while options traders may see a brief bounce for TGT, the overall trend for the next month remains lower.
Click to Enlarge Overall, weekly May 22 series implieds are pricing in a potential post-earnings move of about 4.4% for TGT stock. This places the upper bound at $81.46, while the lower bound lies at $74.54.
Technically, the path lower offers the least resistance, as TGT is trading south of all its major short-term moving averages (save its 200-day moving average near $7-).
Additionally, TGT stock has pulled its 50-day and 10-day trendlines into a bearish cross. While this formation isn’t as potent as a cross of the 50-day and 200-day, it still has bearish short-term implications.
2 Trades for TGT Stock
Put Spreads: While pessimism toward an outperforming stock can be a bullish contrarian sign, technical indicators for TGT have begun to break down sharply in the past couple of weeks. As such, a poor quarterly report on Wednesday could be the proverbial straw that breaks the camel’s back.
Traders siding with the bears might want to consider a June $75/$77.50 bear put spread. At last check, this spread was offered at 89 cents, or $89 per pair of contracts. Breakeven lies at $76.61, while a maximum profit of $1.61, or $161 per pair of contracts, is possible if TGT closes at or below $75 when June options expire.
Call Sells: If betting directly against TGT stock isn’t your style, you might consider entering a weekly May 22 series $83 strike call sell position. Such a trade is especially useful if you already own TGT stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $83.
At last check, this option was bid at 14 cents, or $14 per contract. A sold call allows you keep the premium as long as TGT stock closes below $83 at expiration. On the downside, if TGT rallies above $83 prior to expiration, you could be forced to provide 100 shares at TGT’s current market value for each call sold, which could be quite costly if you do not have enough TGT stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
