Build Your Profits in Lowe’s Stock

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LOW Stock - Build Your Profits in Lowe’s Stock

Source: Mike Mozart via Flickr (modified)

This morning, Lowe’s (NYSE:LOW) reported earnings and Wall Street was initially not happy with what they saw. The stock fell 3% on the headline, though after the open that reversed course and LOW stock is now sitting on 8% gains. Same-store sales missed estimates and forecasts were lowered, which might account for the early negativity. However, they did beat on both earnings and revenue. Leadership also announced plans to fix the problems they saw.

Personally I noticed a sharp drop in my own satisfaction with my visits to their stores. But I will take management at their word that they are able to veer this ship back on course.

There is a legitimate concern over a slowing real-estate economy, especially in the home building arena, but this is not the time to call it a short. We are still in a growth cycle and we are likely to continue to buy housing for as long as rates are this low. The U.S. rates are rising, but they do have a limit for as long overseas yields are zero or negative.

Overall, I am confident that there is no looming abyss coming. Proven support will continue to hold through 2018 and therein lies my opportunity.

Even though the real-estate trade is slowing, I am a confident buyer of the stock at a discount from current levels. So today I share an options trade where I sell downside risk into what others fear. This is an opportunity to create income without any out-of-pocket expense.

Fundamentally, LOW is not cheap at 24 price-to-earnings ratio, but it’s not bloated either. It will be an even better deal 19% below its current price, so this is the definition of a calculated risk. Compare this with risking $108 per share to buy the stock here and then need a rally to profit.

Coming into the earnings, LOW stock was up 15% in three months, which is better than HD and even the now-very-hot S&P Retail ETF (NYSE:XRT).

And technically, Lowe’s stock still has a breakout opportunity. Today’s movement has already carried it to a fresh 52-week high.

LOW Stock Trade Ideas

The Trade: Sell the LOW Jan 2019 $87.50 naked put for 80 cents. This is a bullish trade where I have a 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $86.70.

Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.

The Alternate Trade: Sell the LOW Jan 2019 $87.50/$85 credit put spread which would deliver over 15% in yield but with much smaller risk. Both setups have about the same odds of success and neither require a rally to win.

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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.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/build-your-profits-in-lowes-stock/.

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