TJX Companies Inc (NYSE:TJX) has not had a great 2017, declining 7% year-to-date and 15% in the past 12 months. Luckily, that decline came from all-time high levels, so one could argue that TJX stock has held its own better than most brick-and-mortar retailers.
And maybe it will continue to stay strong.
TJX Companies on Tuesday was slightly up in early trading following on a Street-beating second-quarter earnings report. Profits of 85 cents per share were a penny better than expectations of 84 cents, which is what the company earned in the year-ago quarter. Sales of $8.36 billion were up 6% year-over-year and slid past estimates for $8.3 billion. Comps growth of 3% also beat expectations.
Fundamentally, TJX stock is not expensive from a price-to-earnings perspective. But when I consider that the retail industry is against the ropes, I’d want a holding to be dirt-cheap before I’d consider buying. Just consider that for 19 times earnings I can either buy TJX or Apple Inc. (NASDAQ:AAPL). Saying it that way makes it a no-brainer (and yes, it’s a no-brainer to choose Apple).
Furthermore, TJX delivers net margins of 7% vs AAPL’s 21%. I know what you’re thinking… I shouldn’t compare a tech company to a retail company. Well, my money doesn’t care about sectors. I am looking for value that I can leverage to create profit.
Even if I compare it to Macy’s Inc (NYSE:M), the P/E of TJX stock is double that of Macy’s. But to be fair, the discounter’s stock has performed better than M since 2015. TJX sustained rallies since then and is still holding its own, whereas Macy’s completely fell apart. Even if I compare it to the SPDR S&P Retail (ETF) (NYSEARCA:XRT), which also is down 18% for that same period, it’s clear TJX is sturdier.
Click to Enlarge Technically, TJX has returned to a level that has been in contention since late 2014. Those tend to be sticky, as bulls and bears will want to fight over them fiercely. This could create a stall which would lend some support here. But if $68 per share are fails, $62 could come into view next.
Having said that, you’ll be surprised to learn that I am not shorting TJX today. In fact, I am betting along side the bulls.
Using options, I can still commit bullishly without committing to buying in at the current price. I do that by selling downside risk against support levels, thereby leaving plenty of room for error.
Knives are difficult to catch, and none more so than retail. Yet there are a few stocks that I can still trade the price action like TJX. So this is not a bet that the company will prosper. It’s strictly a bet on its near-term price.
Hot to Trade TJX Stock
The trade: Sell the Oct $60 put and collect 50 cents to open. Here I have an 85% theoretical chance that price will stay above my strike for maximum gains. Otherwise I will suffer losses below $59.50.
Selling naked puts is daunting especially in an industry that is struggling to stay afloat. So I could use spreads instead to soften the risk profile. I sell a spread to limited the risk to the width of the spread less what I collect to open the trade.
The alternate trade: Sell the $62.50/$60 credit put spread where I stand the same odds of success but with limited risk. If the spread wins, it delivers 15% in yield. Compare this to risking $70 per share to buy TJX stock outright, then hoping it can rally another 15%. That’s what it would take to match the potential performance of this spread.
Investing in the stock market is risky. Never bet more than you can afford to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @racernic and stocktwits at @racernic.
