Buy the Dip on Kohl's Stock; Plus, Walmart Gears Up for Earnings

KSS stock options are attractively priced, even with earnings less than a week away

Managing Editor
Aug 15, 2018 at 12:19 PM
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While a poorly received earnings report from Macy's (M) has several retailer stocks in the red today, the sector has been on fire recently. The SPDR S&P Retail ETF (XRT) is fresh off a record high of $51.94 yesterday, and retail sales for July exceeded estimates. In addition, the National Retail Federation (NRF) upped its outlook for retail sales growth in 2018, citing higher wages and tax reform as drivers heading into the holiday season. Against this backdrop, Walmart Inc (NYSE:WMT) is on our radar ahead of earnings, and Kohl's Corporation (NYSE:KSS) stock could be flashing "buy."

Walmart Looking to Buck Recent Post-Earnings Trend

Walmart will report second-quarter earnings before the open tomorrow. Looking at Walmart's earnings history, the stock has closed higher the day after the company reported in four of the last eight quarters, but more recently dropped 1.9% after its May release, and fell 10.2% after earnings in February. Looking back eight quarters, the shares have moved 4.5% the day after earnings, on average, regardless of direction. This time around, however, the options market is pricing in a larger-than-usual 6.3% move for Thursday trading.

On the charts, WMT stock is down 0.9% to trade at $89.97. Shares of the blue-chip retailer have trended higher since grazing the $82 level in May, up roughly 10% in that time frame. However, the stock is staring up at its 200-day moving average, and the round-number $90 level has acted as a speed bump since March.

Daily Stock Chart WMT

Options traders appear to be betting on a breakout, picking up WMT calls at a rapid-fire rate ahead of earnings. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 10-day call/put volume ratio of 3.87. Not only does this indicate calls bought to open have nearly quadrupled puts in the past 10 days, but it ranks 3 percentage points from an annual high, indicating a much healthier-than-usual appetite for bullish bets over bearish in the past two weeks.

Kohl's Stock Flashing Bullish Signal

Looking at Kohl's -- which reports earnings next Tuesday, Aug. 21 -- the stock is down 5% today at $74.60, dragged lower by Macy's quarterly report. Prior to today's pullback, KSS was within a chip-shot of its June 12 record high of $79.92. Overall, the equity has nearly doubled in the past 12 months, and it might be time to buy today's dip. 

Daily Stock Chart KSS

Even with earnings on the horizon, the equity's Schaeffer's Volatility Index (SVI) -- a measure of front-month, at-the-money implied volatility (ATM IV) -- currently stands at just 44%. This SVI arrives in the 17th percentile of its annual range, indicating that speculative players have priced in lower volatility expectations just 17% of the time in the past year.

This combination of a high stock price and low IV has had bullish implications for KSS in the past, according to Schaeffer's Senior Quantitative Analyst Rocky White. Since 2008, there have been three occasions where KSS has been trading within 2% of its annual high while at the same time its SVI was in the 20th annual percentile or lower. Following those signals, the security was up 14.8% one month later, on average, and was higher all three times. From the stock's current perch, a similar surge would place KSS above $85.

Should Kohl's report strong earnings next week, shorts could soon be squeezed. Short interest fell 1.7% in the most recent reporting period, yet the 26.58 million shares still sold short represent 16% of KSS' total available float, and more than 11 days of pent-up buying power, at the stock's average pace of trading.

Furthermore, an unwinding of pessimism could also occur in the options pits. ISE/CBOE/PHLX data shows KSS with a 10-day put/call volume ratio of 2.05, which ranks in the 99th percentile of its annual range. In other words, speculators have been buying Kohl's puts over calls at a much faster-than-usual pace.

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