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The “retailpocalypse” that sent so many department stores and discount retailers into the bargain-basement over the last year seems to be easing. This isn’t true for every firm, but there are some good signs that the so-called “trade wars” are much less likely to have an impact on low-cost imported consumer goods as President Trump and U.S. trade negotiators focus on steel and aluminum. The U.S. needs China’s help to deal with North Korea, which is also likely to create a more accommodative stance with Target Corporation’s (NYSE:TGT) largest international source.
Besides trade, there are a few additional areas where investors are justifiably a little concerned about the market. Weakening oil prices and uncertainty around Italy’s new government would seem likely to cause problems for bulls. However, we still believe that current news is more likely to serve as a catalyst for the market to “climb the wall of worry” as long as the underlying fundamentals remain strong.
Our interest in Target is split between fundamental and technical factors.
From a fundamental perspective, we expect TGT to rise as consumer spending increases. Last Friday’s labor report continued to point towards emerging wage pressure, which should increase spending in the short term. The bright side of a pause in oil prices is that there should be more dollars in shoppers’ wallets after a visit to the gas station, which should also work in TGT’s favor.
TGT released its most recent earnings report on May 23 and, as you can see in the chart below, the news was greeted with some initial skepticism. On the one hand, the company is successfully reorganizing its marketing and store strategies, but that has come with higher costs and lower margins in the first quarter. However, investor sentiment has been forgiving if management is able to drive top-line growth, which is the primary objective behind TGT’s current efforts.
Finally, although Target’s same-day delivery service is in the early stages, we expect investors to respond to the news positively as a way for the company to defend against further encroachment from Amazon.com, Inc. (NASDAQ:AMZN).
TGT’s stock chart has completed a compelling bullish signal that we are using to trigger our trade. An inverted “head-and-shoulders” continuation pattern has been forming since January and was completed with Tuesday’s break above the pattern’s neckline. An attractive pattern like this might have justified a more aggressive entry then what we have planned, but the uncertainty in the market is enough to give us some pause and seek a more income-oriented approach.
‘Sell to open’ the TGT July 77.50 Put (TGT180720P00077500) for a minimum price of $2.00.
Our short put position will pay off the maximum return (approximately 11%) if the stock remains above the strike price through expiration. If that happens, we would re-evaluate Target’s prospects and may want to re-write those puts in July.
If the outlook for the broader market worsens on unexpected news, we may wind up having TGT shares exercised in July, which means we would be long TGT shares (while still keeping the option premium) at a lower price than we could purchase the stock today. Depending on market conditions, the other option is to close the trade and avoid exercise if the outlook worsens unexpectedly.
Our breakeven is equal to the strike price of the puts ($77.50) minus the premium ($2.00), or $75.50 per share. We don’t expect the stock to close at expiration below the strike price, but, in this case, that may not be the worst possible outcome.
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InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
