Surviving Family Dollar in a Wal-Mart World - TheStreet

NEW YORK (TheStreet) -- If you're a current Family Dollar (FDO) investor, Thursday's earnings release must have you scratching your head. The miss and guidance surely did not warrant the selloff at the beginning of trading.

Family Dollar has lost about four percent of its market cap from Wednesday's close. The loss in market cap is despite earnings per share climbing from 91 percent to reach $1.06 per share. Unfortunately, expected earnings moving forward captured Wall Street's attention.

Thursday's move lower broke through support at the 60 day moving average of $67.60. The next area of support to watch is near $64. The widely watched 200-day moving average doesn't come into play until $60. Family Dollar is far from testing the key support.

Family Dollar's CEO Howard R. Levine stated:

"Today, we reported another quarter of strong double-digit earnings growth. I am especially pleased that we delivered these record results even as we launched multiple initiatives late in the quarter to increase our relevancy to the customer and drive greater store productivity."

Insiders sold very few shares in the last six months. Insiders were not buying either, but with over 10 million shares held by insiders, it's clear management believes in the stock, too.

TheStreet's

John Hughes and Scott Maragioglio wrote an interesting Real Money Pro article about the dollar stores titled

Brother, Can You Spare a Dollar Store? (You need a Real Money Pro subscription, but if you don't have one this is this is your reason to get one.)

The soft economy is allowing

Wal-Mart

(WMT) - Get Report

and

Target

(TGT) - Get Report

to execute well, and both are trading higher with conviction from a year ago.

Based on my experience with gaps down following earnings misses similar to Family Dollar, investors will see short-term lows Thursday, Friday or Monday. Thursday's open near the low of the day suggests it won't take much time for the market to figure out the first knee-jerk reaction may be overdone.

Bargain hunters and short-sellers covering positions could push the price up quickly in relation to the gap-down price this week. Looking at the chart, I expect short-term resistance near $68 and again at $71. Round numbers often attract like a price magnet and repel, causing a bounce.

Expect a lot of volume to trade near $68 a share, but also be prepared for bargain hunters to start positions under $65 as an entry. Family Dollar doesn't have oversized debt and the price-to-earnings multiple is reasonable for the growth rate and under 20.

If you are looking for Thursday's drop to signal a buying opportunity, you may find the end of the day Friday or opening on Monday better than Thursday. There is no hurry jumping on board with Family Dollar. Stocks dumping as a result of misses like this one take one or two good earnings quarters to recover. Family Dollar has such a schizophrenic history with earnings (missing as many beats) this is almost par for the course. (Take your time and do your homework before allocating capital here. Look for the second break above $68 as the one that "sticks."

Operating margins, while already low compared to Dollar Tree and Dollar General appear closer to Wal-Mart and Target.

What's the best play with Family Dollar? There should be a very attractive trade coming up Friday and or Monday. Near the end of the day if still trading lower, sell out of the money puts. Fear of continued losses tends to push portfolio insurance prices up dramatically, while at the same time the stock should bottom.

It's not one to get greedy with, hold on for a few days and as the implied volatility falls (hopefully with a nice dead cat bounce) exit out with a quick hit and run for profits.

Otherwise, for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication the author had no holdings in the stocks mentioned.