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Option Idea of the Week: Dillard's

Is DDS destined for new highs?

by 11/23/2012 10:18 AM
Stocks quoted in this article:

Retailers are stealing the show in today's holiday-shortened session, with analysts keeping an eye on Black Friday trends. Among sector components, one underloved stock stands out as a potential contrarian play: Dillard's, Inc. (NYSE:DDS - 86.12), which recently reported stronger-than-expected quarterly earnings and same-store sales. Furthermore, Chief Executive William T. Dillard II said the company is "entering the holiday season confidently based on these strong results."

On the charts, the shares of DDS have skyrocketed roughly 91% in 2012, touching a record high of $86.71 earlier this month. Ushering the stock into the black have been its 10-day and 60-day moving averages, which have acted as support since late July. In fact, the security recently bounced off the former of these trendlines, and is now standing just a hair's breadth from another new high.

Daily Chart of DDS since July 2012 With 10-Day and 60-Day Moving Averages

As alluded to earlier, there could be even more upside in store for DDS, should the bears abandon ship. Currently, the lone analyst following the equity has doled out a tepid "hold" rating, leaving the door wide open for positive initiations. Plus, the consensus 12-month price target among analysts stands at $92.50, implying expected upside of just 7.6% to DDS' closing price of $86 on Wednesday. A flood of price-target hikes could also lure more buyers to the retailer.

Considering DDS has outperformed the broader S&P 500 Index (SPX) by nearly 20 percentage points during the past two months, it's no surprise short interest dwindled by 11.6% during the last two reporting periods. However, these pessimistic positions still account for 11.7% of the stock's total available float, representing six sessions' worth of pent-up buying demand, at the security's average pace of trading. Continued short covering could add fuel to DDS' fire.

Meanwhile, the stock's Schaeffer's put/call open interest ratio (SOIR) stands at 2.54, indicating that puts more than double calls among options with a shelf-life of three months or less. Even more telling, perhaps, the stock's SOIR sits at a 52-week peak, suggesting short-term option traders haven't been more put-heavy during the past year. An unwinding of skepticism in the options pits could translate into a contrarian boon for outperforming DDS.

Investors anticipating new highs for DDS should consider buying the stock's in-the-money February 75-strike calls, which were last asked at $13.


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