Every trader knows how well this earnings season has gone.
Every trader knows that the retail industry brings up the rear as far as timing goes. Outside of the banks traditionally kicking the season off, this is perhaps the most exciting part of earnings. Yes, technology is exciting, but the bunching together of the banks and retail bring focus, and focus is enhanced by the fact that these are all names that are well known to all traders, even those who make their living doing something else.
When it comes to a well-known industry group, such as this, investors also have personal prejudices in place based upon past experience, which makes the season's wrap-up all the more interesting. Staying with retail, this has been a season for the ages, and coming off of the Census Bureau's hot July data nationally, many of the names are raising full year estimates.
What do Walmart (WMT) - Get Report , Target (TGT) - Get Report , Home Depot (HD) - Get Report , Lowe's (LOW) - Get Report , TJX (TJX) - Get Report , Kohl's (KSS) - Get Report , Nordstrom (JWN) - Get Report , Macy's (M) - Get Report , Urban Outfitters (URBN) - Get Report , Williams-Sonoma (WSM) - Get Report , Tapestry (TPR) - Get Report , Estee Lauder (EL) - Get Report and even poor L Brands (LB) - Get Report all have in common? They all beat expectations this quarter for earnings per share and for revenue. On top of that, most of these names also posted impressive comparable sales without seeing cannibalization from the e-commerce side.
Watch how to trade retail below.
The bottom line here is that the American consumer is back.
Tax cuts have created disposable income for those fortunate enough not to live in "high real estate tax" states, where the lack of wage growth above and beyond inflation could not be overcome. Is this a one-off? Or is this more sustainable? I seem to remember a couple of key central bankers mentioning over the years something called "break-away" velocity. Guess I'll let you know in six-to-nine months how that turns out.
Next week, the stragglers come in. Among them will be some more retail names such as Best Buy (BBY) - Get Report and Tiffany (TIF) - Get Report on Tuesday, and then Abercrombie and Fitch (ANF) - Get Report , Burlington Stores (BURL) - Get Report , Ulta Beauty (ULTA) - Get Report and Lululemon (LULU) - Get Report on Thursday. I already wrote about Lululemon back on Tuesday. My focus for the moment falls upon a name that now seems sort of under the radar -- Best Buy.
Wall Street consensus for Tuesday's release is for EPS of $0.82 on revenue of $9.27 billion. These numbers, if precise, would represent year-over-year growth of 18.8% and 37%, respectively. Whispers are running several cents above expectations.
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A word of caution: The industry's average price target for this name is $79, or 4.36% lower than last night's closing price. According to Thomson Reuters, 14 of 22 analysts Street-wide have a "hold" rating on this name. Of the rest, five are positive while three are negative. Not much guidance there. I, by the way, am long this name -- and I have a 15% gain on the position that I need to protect going into the numbers.
Best Buy recently announced the acquisition of Great Call for $800 million in cash. Great Call is a provider of health and emergency services for the aging. The operation has 900,000 paying customers. Does this expansion away from big box retail and into health and wellness illustrate a keen awareness of the marketplace, or is this the kind of blurring of focus that often gets firms into trouble?
How to protect a hard-earned win in a name that you're not sure you still trust. A long time ago, a quarterback named Joe Pisarcik learned that maybe kneeling on the ball at the end of the game is better than running something out of the playbook as time expires. This is what I'm going to do.
--Sell all or most of my long. Your spider sense can be your best pal. Take a profit. What does Jim Cramer say? Nobody ever got hurt ringing the cash register.
Because I'm adventurous, and always trying to turn a buck, there's more.
Prior to this pre-earnings run-up, the stock had hit resistance regularly at a level below $79. The rising trend line of support loosely correlates, at least for August, with the 50-day Simple Moving Average.
--Sell (write) one $78 Aug 31 put (last 1.29).
--Sell (write) one $75 Aug 31 put (last 0.66).
1) Best Buy goes higher. I still sold my shares, but at least I have added $195 to my net profit on the entire trade.
2) Best Buy trades lower. If forced to eat the shares, I will have made my sale at something close to $82.60, and my re-entry would be initiated with a net basis of $75.52. This means that even if the name trades in my face, I will have extracted more than $7 per share and ended up with a similar-sized long position. Far worse things have happened to far better people.
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At the time of publication, Guilfoyle was long WMT, HD, KSS, M, BBY equity. Short LULU put options.