Family Dollar Stores (FDO) is an intriguing stock and a potential earnings play to kick off the season right.
The company is seemingly in the right retail space — deep discounter — where many consumers have settled to cope with the shaky economy.
But is that enough?
Recent data shows consumers are saving rather than spending. Unemployment rolls are expanding, albeit at a slower rate, and the jobless rate is marching toward 10% and beyond. And the granddaddy of all discounters — Wal-Mart (WMT) — is down 14% so far in 2009, trailing the broader market by a wide margin. What’s up with that?
FDO is struggling on the chart. Although up for the year, the shares sit 20% below their April high. The one technical positive, though, is the 200-day moving average, which has solidly supported the stock for the past three weeks. That’s a huge consideration for a potential trade.
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Sentiment toward FDO is all over the map. The Street is less than thrilled with the company, as just four of 14 covering analysts rate the stock a “buy.”
But options players feel differently. FDO’s put/call ratio is sitting at an annual low. The problem is that neither the analyst ratings nor put/call ratio have changed much in the past three months. That makes sentiment mostly a wash, putting the technicals in the spotlight.
Earnings expectations for Q2 are robust, but are not out of line with what the company has produced during the past year. FDO usually beats the consensus estimate by a penny or two (it hasn’t missed in two years), but the post-earnings performance is typically mediocre.
The key is how the stock behaves around the 200-day. If support holds and the market appears to be firming after the three-day weekend, this could be a nice call play to start the earnings season. If not, we’ll probably stay on the sidelines and look for other opportunities.
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Jon Lewis is the co-editor of The Winning Edge trading service designed to help you make options profits around corporate earnings and other market events. For more information about Jon, read his bio here.
