It’s no secret that retail sector stocks have been decimated by Amazon.com, Inc. (NASDAQ:AMZN). Behind the leadership of Jeff Bezos, they completely shifted consumer behavior in favor of buying online. They were able to deliver so fast that they eliminated the instant gratification advantage that brick-and-mortar stores had. In place of it, consumers now favor convenience and ordering with one click.
In 12 months, the SPDR S&P Retail (ETF) (NYSEARCA:XRT) is down 11%, while the general markets are setting new high after another. Coming into its earnings report this morning, TJX Companies Inc (NYSE:TJX) is doing better, currently down only 3.5%. Alas and after this morning’s reaction, it is down much more.
Wall Street hated what it saw in the earnings. TJX management delivered bad news as they blamed the weather for the miss on all counts. This year, the weather factor was legit, as it physically interrupted the flow of retail. But investors are not buying the argument; they are disappointed.
What’s the Deal With TJX Stock?
Fundamentally, we all know that TJX — much like all of retail — is in a rebuilding phase. So most of my bets in the sector are bets on price action more than valuation. Nevertheless, TJX has a price-to-earnings ratio of 20. While this sounds low, compare it to the best company on the planet Apple Inc. (NASDAQ:AAPL), which also has a P/E of 20X, then suddenly the value becomes less impressive.
TJX also pays a dividend and that helps me justify my bet. Today, I will place risk below the current price. This will help me generate income from nothing. If the TJX stock price holds above it, then I would retain maximum gains. However, if the price goes against me, then I must be ready to own the shares at a discount.
Instead of buying TJX shares at face value and risk $68 here without any buffer, I will use TJX options instead. This way, I can choose where and when to risk my money. In a sector this vulnerable, it is imperative that I build a moat around my trade, otherwise I would be trading with too much hopium of a change in course for retail.
Moreover, we will get more retail earnings soon. For example, Target Corporation (NYSE:TGT) and Best Buy Co Inc (NYSE:BBY) to name two who report soon. If investors sell those two events, TJX stock will suffer more downside. So I can nibble here and then add more if needed towards the end of the week.
The Trade: Sell the TJX Apr 2018 $55 put for 75 cents per contract. Here, I have an 85% theoretical chance of retaining maximum gains. But if the price falls below it, then I own the shares and would suffer losses below $54.25.
Selling naked puts carries big risk, especially in a sector as weak as retail. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the TJX Apr $55/$50 credit put spread; here risk is limited. Yet if the spread wins, it delivers 8% in yield.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free 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 as @racernic on twitter and stocktwits.