Retailing giant Target Corporation (TGT) will be facing a wellspring of bearish sentiment when it steps into the earnings confessional ahead of the open this Wednesday. Despite a recent upgrade from Stifel to “buy” from “hold,” the vast majority of traders and analysts appear to be betting against Target stock. That one small upgrade prompted a serious jump in TGT, but are the shares too overbought to extend their recent rally?
For the record, Wall Street is expecting a third-quarter profit of 47 cents per share from Target, marking a modest increase over the same quarter last year. Target has struggled with narrowing margins for the past several quarters — a development that helped end a long string of better-than-expected quarterly reports for the company. In fact, prior to the last two quarters, TGT had topped the consensus estimate in each quarter dating back to 2010.
How quickly optimism evaporates.
Taking a look at analyst activity, not many brokerage firms are as optimistic as Stifel. According to Thomson/First Call, 21 of the 28 analysts following Target stock rate the shares a “hold” or worse. Additionally, the stock is trading well north of the 12-month consensus price target of $60 per share, with TGT closing at $67.61 on Friday. As we saw on Nov. 10, upgrades and price-target increases could go a long way to bolstering investor confidence in the stock.
Turning to the options pits, we find that speculative short-term traders are just as bearish on the prospects of Target stock as the brokerage community. Specifically, the put/call open interest ratio for the November/December series of options arrives at an elevated 1.75. That said, this reading has nothing on the front-month November put/call open interest ratio, which arrives at 2.32, with puts more than doubling calls among options set to expire at the end of this week.
While the Nov $61-$59 strikes are littered with put contracts, the Nov $60 sports peak put open interest of 8,468 contracts. The next most popular put is the Nov $59.50 strike, with 4,100 contracts, while the Nov $67.50 call has attracted 4,452 contracts.
Click to Enlarge Overall, November implieds are pricing in a potential post-earnings move of about 3.7%. This places the upper bound on TGT at $69.98, which is just shy of potential technical resistance at the $70 level, while the lower bound lies at $65.02, which is just above short-term technical support.
Options Trade on Target Stock
Despite Target stock verging on overbought territory, I believe that the shares still have some gas in the tank — especially with the holiday shopping season just around the corner. While third-quarter earnings should arrive in line, guidance could be better than expected, potentially leading to a shift in sentiment for TGT stock.
For those willing to take a risk, a Dec $67.50/$70 bull call spread has potential.
At last check, this spread was offered at $1.06, or $106 per pair of contracts. Breakeven lies at $68.56, while a maximum profit of $1.44, or $144 per pair of contracts, is possible if TGT stock closes at or above $70 when December options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
