Kroger Is a Long-Term Buy … Once KR Stock Settles Down

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KR stock - Kroger Is a Long-Term Buy … Once KR Stock Settles Down

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As a Greater-Cincinnati native, I can’t help but cheer when a local company does well. Last week, Cincinnati-based Kroger (NYSE:KR) proved Wall Street wrong when it posted impressive quarterly earnings results. Sentiment had grown dour in the wake of the Amazon (NASDAQ:AMZN) acquisition of Whole Foods, providing KR stock bulls with an opportunity.

Now, however, the short-term outlook for KR stock is one of retreat and consolidation. For both KR options and stock traders, the situation once again presents opportunities.

Starting off with the technicals, KR rallied more than 9% in the wake of last week’s quarterly report. Earnings were just that good, and Wall Street was expecting more pressure from Amazon’s Whole Foods. But KR stock ran smack into resistance near $30.

Kroger last held its ground north of $30 late last year. And while I believe that KR stock is destined to reclaim this technical support level, the current market sentiment won’t support it. In fact, the shares are pulling back today amid broad market weakness.

Furthermore, KR stock is heavily overbought. In fact, it’s 14-day relative-strength index (RSI) is hovering north of 85. Readings above 70 are generally considered overbought. Barring a massive shift in Wall Street sentiment, KR stock is set to trade lower for the next several weeks, potentially filling in its post-earnings gap higher before resuming its rally.

And KR stock is sure to resume its rally. Amazon is having trouble getting Whole Foods up to speed. It turns out running a brick-and-mortar store is a bit harder than the online retailer expected. What’s more, there is plenty of room for multiple players in the $600-billion grocery market. Kroger is ambitious, well run, and will continue to have a presence in many locations where consumers just prefer grocery shopping at a local store.

Last week’s quarterly report was a signal to Wall Street analysts that they have underestimated Kroger’s potential in the Amazon/Whole Food era. And KR stock will bounce back … but it will take another quarter or two for those bearish analysts to reconsider their positions.

There are quite a few of them. According to Thomson/First Call, only nine of the 25 analysts following KR stock rate the shares a “buy” or better. Additionally, the 12-month price target rests at $29.71, just below KR’s close on Friday. Upgrades from these bearish holdouts could soften KR stock’s coming pullback, but the shares will still need to blow off some steam before resuming their run higher.

On the options front, KR’s short-term outlook remains quite bearish. The July put/call open interest ratio rests at 0.96, with calls and puts in near parity. Looking longer term at October, this ratio shifts gears sharply and rises to 0.56. This bull/bear disparity reflects exactly what I talked about above: short-term weakness, with long-term growth potential.

And that how we’re going to trade KR stock today…

2 Trades for KR Stock

Put Sell: The idea with a KR stock put sell position is to own KR shares at a reasonable price to take advantage of the company’s long-term growth prospects.  With KR stock likely to fill in its post-earnings gap higher before the shares gain their feet, a July $27.50 put sell should position you to pick up the shares in that price range.

At last check, this put was bid at 21 cents, or $21 per contract. You will keep this premium as long as KR stock closes above $27.50 when July options expire, but that’s not our goal here. We’re looking to own KR stock at $27.50. If the shares do not fall below $27.50 below expiration, just roll the strike out to August and continue as planned.

Remember, you need enough capital to buy 100 shares of KR stock for every sold put you are assigned.

Bear Put Spread: For short-term profits on a decline, a July $28/$28.50 bear put spread has considerable potential. At last check, this spread was offered at 10 cents, or $10 per pair of contracts. Breakeven lies at $28.40, while a maximum profit of 40 cents, or $40 per pair of contracts — a nearly 400% return — is possible if KR stock closes at or below $28 when July options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.


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