2 Retail Stocks That Could Be a Bargain Right Now

Ralph Lauren (RL) will report earnings tomorrow, and the stock tends to rally in November

Nov 1, 2017 at 1:35 PM
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While the SPDR S&P Retail ETF (XRT) has averaged a loss of 0.07% in November, going back 10 years, there are still bullish opportunities among retail stocks, if past is prologue. Specifically, a duo of retailers could outperform in the short term: discount retailer Dollar Tree, Inc. (NASDAQ:DLTR) and apparel maker Ralph Lauren Corp (NYSE:RL), which reports earnings tomorrow. Below, we'll take a look at DLTR, and RL stocks, both of which are surrounded by skepticism.

Pessimism Plagues Outperforming DLTR Stock

Dollar Tree has been one of the best stocks to own in the month of November, ending higher 80% of the time, going back a decade. In fact, DLTR shares have averaged a monthly gain of 4.83%, according to data from Schaeffer's Senior Quantitative Analyst Rocky White, exceeding even that of retail titan Wal-Mart (WMT) stock.

Since touching an annual low of $65.63 in mid-June, DLTR stock has skyrocketed about 38%, and was last seen trading around $90.62. Another 4.83% rally in November would put the security around $95 -- north of its Oct. 23 annual high of $93.68.

dollar tree stock chart

Despite handily outperforming the record-setting S&P 500 Index (SPX) during the past three months, Dollar Tree remains plagued by pessimism. Just half of the 16 analysts following the shares deem them worthy of a "buy" or better rating, leaving the door wide open for potential upgrades to drive DLTR higher.

And while absolute options volume runs light, these speculators are more put-skewed than usual. The stock's Schaeffer's put/call open interest ratio (SOIR) of 1.41 is higher than 96% of all other readings from the past year, suggesting near-term traders have rarely been so put-biased. An unwinding of optimism in the options pits could also be a boon for DLTR stock, especially if the company reports stronger-than-expected earnings later this month.

Ralph Lauren Stock Could Hit YTD Highs After Earnings

Ralph Lauren stock has also been on a tear over the past few months. Since touching a nearly eight-year low of $66.06 in late May, RL stock has rallied roughly 35%. In fact, the equity skyrocketed more than 13% in early August, thanks to a well-received earnings report, and has now found support in the $84-$86 area -- where the stock was trading before a February bear gap, and a region that acted as resistance in May.

ralph lauren stock chart

At last check, RL stock was trading at $89.04. Over the past 10 years, the shares have ended the month of November higher 80% of the time, averaging a monthly gain of 3.62%. A similar rally this month would put the stock around $92.30 -- and close to year-to-date highs.

As alluded to earlier, Ralph Lauren is set to report earnings tomorrow, and the stock crushed it after the August report. Over the past eight quarters, RL has moved higher in the session after earnings five times, and has moved an average of 10% in its post-earnings session, regardless of direction. A 10% swing to the upside after tomorrow's report would put RL stock around $98 -- territory not charted since December.

As with DLTR, RL has few fans on Wall Street. Just two of 16 analysts offer up "buy" or better opinions, and short interest accounts for more than 10% of the stock's float. It would take shorts more than a week to buy back these bearish bets, at RL's average daily trading volume. Should the retailer report strong earnings tomorrow, a flood of upgrades or a short squeeze could propel the shares even higher.

Meanwhile, the equity's SOIR stands at an annual high of 2.92, indicating puts nearly triple calls among options expiring within three months. In the same vein, buyers have been upping the bearish ante of late. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 2.47 is in the 85th percentile of its annual range. A mass exodus of option bears could help Ralph Lauren stock continue its trend of positive Novembers.

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