2 Retail Stocks for Short-Term Bulls

DG tends to rally in Q3, while ROST stock is flashing a buy signal

Jul 5, 2018 at 1:34 PM
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Looking back 10 years, only two S&P 500 stocks boast a 100% win rate in the third quarter, which kicked off this week. One is discount retailer Dollar General Corp (NYSE:DG). If past is prologue, DG stock could rocket to record highs in the short term. Meanwhile, shares of fellow retail issue Ross Stores, Inc. (NASDAQ:ROST) are flashing a historic "buy" signal right now, suggesting it could be time to buy ROST call options.

Dollar General Tends to Dominate in Q3

Dollar General stock has ended the third quarter higher 100% of the time since it began trading, averaging a healthy gain of 7.08%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. Only one other stock -- healthcare concern McKesson (MCK) -- has racked up a similar quarterly hot streak.

DG shares have surged nearly 13% since their most recent low of $86.87, touched in late May, and they're up 40.5% year-over-year. The stock was last seen trading around $98.42, and another 7.08% pop from current levels would place it right above $105 -- and within striking distance of January's all-time high of $105.82.

DG stock chart july 5

Should Dollar General shares resume their long-term uptrend, quite a few short sellers could hit the bricks. Short interest on DG jumped nearly 37% in the most recent reporting period, and now accounts for about 6.7 million shares.

Likewise, recent options buyers have been more bearish than usual. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 1.78 is in the 78th percentile of its annual range. An exodus of option bears could propel DG stock higher.

Traders looking to speculate on Dollar General's short-term trajectory should consider options. The stock's Schaeffer's Volatility Index (SVI) of 23% is in just the 12th percentile of its annual range, suggesting near-term options are pricing in relatively low volatility expectations right now.

ROST Options Signal Flashes Again

Ross Stores stock notched an all-time high of $87.22 just last week. The equity has been in a channel of higher highs since March, and was last seen trading around $85.09 -- in an area that stifled ROST's upward momentum back in January.

ROST stock chart july 5

Meanwhile, ROST's near-term options are relatively inexpensive. The stock's SVI of 22.1% is in the 12th percentile of its annual range. There have been just four other times since 2008 in which the security was within 2% of a 52-week high and had an SVI in the bottom 20% of its annual range, per data from White. After those signals, ROST shares were higher 75% of the time a month later, and averaged a gain of 3.31%. A similar push would place the retail stock around $87.91 -- back in uncharted territory.

In the same vein, Ross Stores sports a Schaeffer's Volatility Scorecard (SVS) of 85 out of 100. This indicates that ROST shares have exceeded options traders' volatility expectations in the past year -- a boon for would-be premium buyers.

Should the stock resume its journey to higher highs, a slew of shorts could jump ship. During the past two reporting periods, short interest skyrocketed 45%, and now totals 6.3 million ROST shares.


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