Shares of Urban Outfitters, Inc. (NASDAQ:URBN) have had a rough couple of months. URBN stock has been pressured lower by its 10- and 20-day moving averages since March, and, as a result, the shares are now trading in oversold territory.
Currently, Wall Street is expecting a profit of 30 cents per share from Urban Outfitters, a 15% improvement over earnings of 26 cents per share in the same quarter last year. Revenue, meanwhile, is seen rising 10.5% year-over-year to $7.58.25 million.
Fundamentally, Urban has been on shaky ground during the past four reporting periods, missing expectations twice, matching once, and topping expectations once. That earnings beat occurred in the fourth quarter, and could be a sign that Urban is on the mend.
While one quarter does not a trend make, analysts appear to be quietly hopeful that the company will issue a repeat performance in the first quarter. Specifically, EarningsWhisper.com reports that Urban’s first-quarter whisper number arrives 2 cents higher than the consensus at 32 cents per share. Hitting the whisper number could be a big deal for URBN stock.
Why? Because nearly everyone on Wall Street is betting against the company. Within the brokerage community, Thomson/First Call reports that 22 of the 35 analysts following URBN stock rate the shares a “hold” or worse. Additionally, the $45.50 12-month target price represents a conservative premium of about 15.7% to yesterday’s close.
Elsewhere, short sellers have loaded up on URBN stock. As of the most recent reporting period, some 8.1 million shares of URBN stock were sold short, accounting for 8.2% of the stock’s total float, or shares available for public trading. A positive report on Monday has the potential to spark a short-squeeze situation that could add fuel to a URBN rally.
Turning to the options pits, short-term speculative traders are also leaning toward the bearish end of the spectrum. For instance, URBN’s June put/call open interest ratio of 0.90 indicates that calls and puts are in near parity heading into the company’s quarterly report. Not only does this data hint at a lack of concern from short sellers (who typically buy calls as a hedge), but it is also a bit unusual to see this low a level of call activity heading into a quarterly earnings report.
Click to Enlarge Overall, June implieds are pricing in a potential post earnings move of about 8.7% for URBN stock. This places the upper bound at $42.41, while the lower bound lies at $35.59. You’ll notice that these levels roughly correspond with URBN’s 50-day and 200-day moving averages, meaning that that a post-earnings move could be limited in terms of follow-through activity.
2 Trades for URBN Stock
Call Spread: Bearish sentiment is par for the course of a stock with short-term technical woes such as URBN, but the decline may have gone too far at this point. The shares appear to be firming near support in the $40 region, and analysts will be looking for signs of a continued turnaround in Urban’s quarterly report. Any such signs could provide a catalyst for a rally.
As such, traders looking to take a chance on an URBN rebound might want to consider a Jun $40/$42 bull call spread.
At last check, this spread was offered at 64 cents, or $64 per pair of contracts. Breakeven lies at $40.64, while a maximum profit of $1.36, or $136 per pair of contracts, is possible if URBN closes at or above $42 when June options expire.
Put Sell: On the other hand, Urban will have its work cut out for it in terms of impressing the bearish contingent on Wall Street. The shares are also heavily beaten down, and summer can be a slow period for trendy teen retailers. Those with a bullish-to-neutral bias on URBN might consider a Jun $31 put sell position.
After the close last night, the June $31 put was bid at 16 cents, or $16 per contract. The upside to this put sell strategy is that you keep the premium as long as URBN stock closes above $31 when these options expire. The downside is that should URBN trade below $31 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $31 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.