Buy Calls on This Retail Stock, If History Is Any Guide

L Brands (LB) will report earnings soon, and the stock has been on a tear lately

by Andrea Kramer

Published on Nov 13, 2017 at 2:27 PM

Retailers will remain in the spotlight this week, with a handful of big-box and apparel stores reporting earnings. Among them is Victoria's Secret parent L Brands Inc (NYSE:LB), which is slated to report third-quarter figures after the close on Wednesday, Nov. 15. Below, we'll take a look at LB stock and why recent options buyers don't have history on their side.

LB stock has rebounded roughly 39% since touching a nearly six-year low of $35 in mid-August. The shares are down 2.1% at $48.63 today, but still remain on pace for a third straight close atop their 200-day moving average -- a feat accomplished just one other time since early 2016, when L Brands shares were flirting with record highs.

What's more, LB stock could chug even higher over the next six months, if past is prologue. The retailer is among the 20 best stocks to own from November through April, relative to the previous six months. Specifically, LB averages a healthy 9.52% gain in the November-through-April period, besting its May-to-October average return of 6.02% since 2010, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Another 9.52% rally from current levels would place LB stock around $53.25 -- near where the security was trading before a July bear gap.

The stock is already living up to its trend of outperforming in the fourth quarter. LB has averaged a quarterly gain of nearly 10% over the past 10 years, and is up a healthy 16.5% so far in the fourth quarter of 2017.

Should L Brands report stronger-than-expected earnings later this week, an exodus of option bears could add fuel to the equity's fire. 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 sits at a lofty 3.58. This ratio registers in the 89th percentile of its annual range, pointing to a healthier-than-usual appetite for bearish bets over bullish during the past two weeks.

A short squeeze could also propel LB stock higher, if the retailer's earnings impress. Short interest grew 32.5% during the past two reporting periods, and now represents nearly seven sessions' worth of pent-up buying demand, at the equity's average pace of trading. In the same vein, there's plenty of room for upgrades, if the shares extend their recent rally. Just seven of 25 analysts offer up "buy" or better endorsements.


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