Anyone looking for news to trade on should be a happy camper this week, as around 130 S&P 500 companies are on the earnings report schedule. Thursday is an especially active day, with 50 of the big names reporting.
One of the Thursday reports is grocer Safeway Inc. (NYSE: SWY), which reveals its numbers before the open. Analysts expect 39 cents per share compared to 57 cents last year, a 31% decline. That’s pretty much in line with what the company has logged for the past three quarters.
An article in this weekend’s Barron’s suggested that the stock could “easily” climb 50% based on undervaluation and signs of a rebound in its main California market. We don’t know about 50%, but the setup before earnings suggests enough strength to make option players happy.
Currently, the stock is struggling to overcome its 20-day moving average, a trendline that has guided the shares lower for the past three months. Unlike past peaks, however, the stock is hanging onto the 20-day, which is an encouraging sign.
We also like SWY’s option open interest configuration at the August 20 strike, which shows more than 19,000 puts compared to just 1,500 calls. Why? First, it’s an indication of bearish sentiment and, thus, low expectations. Second, heavy put open interest strikes often represent levels of solid support.
Speaking of sentiment, just 5 of 18 covering analysts rate the stock a “buy,” which fits in nicely with our theme of low expectations. And a short-interest ratio above four may lead to some short covering should SWY’s earnings impress the Street even a little bit.
We like low-expectation stocks for our bullish option plays. SWY fits into that category, especially if its guidance hints at recovery as suggested by Barron’s.
The near-the-money SYW Aug 20 Call is fairly priced and well-positioned to take advantage of a post-earnings pop.
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