2 Retail Stocks Expected to Make Big Earnings Moves

Options traders are picking up JWN calls at a much faster-than-usual clip

Managing Editor
Mar 1, 2018 at 10:03 AM
facebook twitter linkedin


Retail earnings have been in the spotlight this week, with Macy's (M) and Best Buy (BBY) among the companies scoring earnings wins. Today, we will look at Gap Inc (NYSE:GPS) and Nordstrom, Inc. (NYSE:JWN) stocks ahead of the retailers' earnings reports tonight, and how options traders are expecting much bigger-than-usual reactions this quarter.

Gap Surrounded By Pre-Earnings Skepticism

Gap stock touched a two-year high of $35.68 on Jan. 23, before pulling back with the broader equities market. However, the shares found a foothold atop their 80-day and 100-day moving averages. In fact, pullbacks to the former trendline have marked short-term buy signals for GPS in the past. Today, however, GPS stock is succumbing to broader headwinds, down 1.5% at $31.11.

Looking back eight quarters, Gap shares have averaged a one-day post-earnings move of 5% in either direction in the session after the company reports, but jumped an impressive 7% the day after its most recent earnings. For this particular quarterly report, the options market is pricing in a much larger-than-usual 10.3% move for Friday's trading, going by implied volatility (IV) data.

Despite GPS stock's gain of more than 38% in the past nine months, only two of the 19 analysts following the stock carry "buy" recommendations, which leaves ample room for more upgrades on another earnings win. Likewise, price-target hikes could be in store, as the average 12-month price target of $31.34 is within pennies of the equity's current perch.

Another solid earnings report could also frighten several shorts. Gap stock saw short interest grow nearly 28% in the most recent reporting period. It would take GPS bears a full week to buy back their positions, at the security's average daily trading volume -- which would be plenty of fuel for a short squeeze to send the retail stock higher.

JWN Shorts Could Be Seeking an Options Hedge

Nordstrom stock has rallied roughly 32% since touching an annual low of $37.79 in early November, and just notched a fresh two-year high of $54 on Feb. 23. At last check, JWN shares were down 2.1% at $50.22, testing round-number support.

Gearing towards earnings, JWN ended higher the day after earnings in four of the past six quarters, rallied 5.7% the day after its February 2017 report. Checking back on the last eight quarters, shares of Nordstrom averaged a post-earnings move of 6.2% in either direction in the session after the company reports. However, the options market is pricing in a larger-than-usual 10.6% move for Friday's trading, per IV data.

Digging deeper, traders have been leaning picking up calls at a rapid-fire rate. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows JWN with a 10-day call/put volume ratio of 4.96, ranking in the 94th percentile of its annual range. This suggests Nordstrom calls have been purchased over puts at a much faster-than-usual clip in the past two weeks.

However, considering JWN has rallied so hard off its November low, it's possible that some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to short sellers seeking an options hedge. Short interest represents nearly 16% of the stock's total available float, or roughly two weeks' worth of pent-up buying demand, at JWN's average pace of trading.


A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earnings guide for Q3 before it's too late!


  
 
Special Offers from Schaeffer's Trading Partners