Retailers Among the Worst 2Q Stocks to Own

KSS stock and TGT stock are historically among the worst performers in the second quarter

Mar 29, 2017 at 12:14 PM
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Yesterday we examined some of the best stocks and exchanged-traded funds (ETFs) based on performance in the second fiscal quarter over the past 10 years. Today we're switching gears to examine the serial laggards for the upcoming three-month period. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, one of the sectors least likely to give solid returns in the quarter is Retail. In fact, the SPDR S&P Retail ETF (XRT) has given a positive return just 50% of the time over the last decade, with an average gain of 0.2%.

Worst 2Q ETFs March 29

Option Bulls Continue to Target XRT as Retail Sector Lags

Shares of XRT have shed 8.7% year-over-year at $42.23. According to our internal Sector Scorecard, only 35% of the 66 components we follow under this umbrella are currently trading above their 80-day moving averages.

While retail stocks rally today in response to some upbeat earnings results, XRT continues to trade below resistance at the declining 50-day moving average -- a trendline it hasn't topped on a closing basis since Jan. 4. Meanwhile, options traders have yet to shy away from optimistic bets. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the SPRD S&P Retail ETF has a 50-day call/put volume ratio of 0.85 -- put-skewed on an absolute basis, but representing an annual bullish high.

KSS Stock, TGT Stock Among the Worst 2Q Performers

Shifting our view to individual stocks, several retailers appear on the list of 2Q's worst performers. Kohl's stock has finished the second quarter positive only twice in the last 10 years, averaging a painful 7.7% loss. A bit further down the list is Target stock, which hasn't fared much better, finishing the period higher just 30% of the time, with an average 1.8% decline.

Worst 2Q Stocks March 29

Not All Put Players are Bearish on KSS Stock

Sitting on a 19% year-to-date deficit at $39.93, KSS stock has spent more than a month bumping up against resistance at its 50-day moving average. As such, it's unsurprising sentiment toward the shares already appears skewed to the bearish side. Of 14 analysts follow KSS, 11 rate the stock a "hold" or "strong sell." Short interest now accounts for over 13% of the equity's available float, and would take over a week to buy back, at the stock's typical daily volume. Still, these bearish bets have fallen since their January peak, leaving room for further pessimists to pile on.

In the options pits, KSS sports a 10-day put/call volume ratio of 3.26 across the ISE, CBOE, and PHLX -- a reading in the 87th annual percentile. That doesn't mean everyone's a bear though. Over the past 20 sessions, the stock has seen roughly 1.5 puts sold to open for each one bought. In fact, the top open interest position by a mile is the April 35 put, where the major exchanges suggest a majority of positions were opened by put writers, betting on a short-term floor.

That said, it appears a much more attractive time to buy near-term options on Kohl's Corporation (NYSE:KSS) than to sell them. With a Schaeffer's Volatility Index (SVI) of 33% -- in the low 8th percentile of its annual range -- premium is well-priced from a volatility standpoint. Plus, a Schaeffer's Volatility Scorecard (SVS) of 80 suggests KSS stock has outperformed the volatility expectations priced in over the past year.

Long Calls Remain Popular on Battered TGT Stock

Though the shares are enjoying today's sector rally, up 3.4% to $55.38, TGT stock has shed 33.8% over the past 12 months, notching a multi-year low just last week. Analysts have set their expectations low, with only four of the 18 tracking firms recommending buying the shares. But that skepticism doesn't seem to extend to options traders, who have changed course in recent weeks.

Specifically, speculators have been purchasing TGT calls at double the rate of puts over the past 10 days on the ISE, CBOE, and PHLX. The resulting call/put volume ratio of 2.06 ranks higher than 86% of the past year's readings. Echoing this call skew is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.75, which rests just 1 percentage point from an annual low, indicating call open interest outweighs put open interest among near-term options to an extent rarely seen in the last 12 months.

It looks like a prime time for short-term options buyers to get in on the action, too. With an SVI of 18% -- in just the 9th annual percentile -- Target Corporation's (NYSE:TGT) near-term options are pricing in muted volatility expectations. What's more, an SVS of 99 suggests TGT stock has made significantly larger moves over the past year, compared to what options traders priced in.

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