Earnings Preview: Lowe's Companies, Inc. (LOW)

Skepticism seems to be building ahead of Lowe's Companies, Inc.'s (LOW) quarterly earnings report

Kirra Fedyszyn
Nov 15, 2016 at 11:51 AM
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Home improvement retailer Lowe's Companies, Inc. (NYSE:LOW) is trading 0.6% lower today at $69.59, following sector peer Home Depot Inc's (NYSE:HD) turn in the earnings confessional. While HD briefly edged higher on an earnings beat, the stock quickly reversed course, and is now down 2.5%. Meanwhile, traders are bracing for LOW's own quarterly results, due for release before the open tomorrow.

The action in LOW's options pits is accelerated at midday, with puts changing hands at roughly four times the typical intraday pace -- though calls still lead on an absolute basis. More generally, the stock's options volume is running in the 99th percentile of its annual range, even with open interest already perched at a 12-month high.

Drilling down, the November series is popular, accounting for eight of LOW's 10 most active strikes. It looks like some bullish speculators may be purchasing new positions at the November 69.50 call, expecting a rally by week's end, when the option expires. Meanwhile, bearish options traders could be buying to open the November 66 and weekly 11/25 67-strike puts, anticipating extended losses in the near term.

These mixed pre-earnings expectations make sense, given LOW's history. Over the last eight quarters, the stock has moved to the upside in the session following its quarterly report five times. However, the most recent earnings release resulted in the stock dropping 5.6% in the ensuing session. LOW's average one-day post-earnings move in either direction over the past two years clocks in at a modest 3%, but options traders are currently pricing in a wider 7.8% swing this time around.

Taking a step back, bearish sentiment has been growing in LOW's options pits of late. The stock's 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) comes in at 1.19. Moreover, this ratio sits above 80% of all comparable readings taken in the past year.

Outside of the options arena, short interest accounts for just over 1% of LOW's total float. But these bearish bets have been on the rise, growing by nearly 26% during the two most recent reporting periods.

Regardless of tomorrow's earnings outcome, traders have good reasons for being skeptical toward Lowe's Companies, Inc. (NYSE:LOW). For one, the stock is sitting on an 8.4% year-to-date loss. Plus, the shares were recently rejected at the round $70 level, which previously served as support. This price point also coincides with the stock's declining 50-day moving average -- a trendline the shares haven't topped on a closing basis since mid-August.

LOW Daily Chart Nov 15

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