2 Retail Stocks That Could Rally in the Short Term

JWN tends to outperform in July, while ROST historically shines in Q3

by Lillian Currens

Published on Jun 27, 2019 at 1:02 PM
Updated on Jun 27, 2019 at 1:03 PM

Goldman Sachs just downgraded retailers Nordstrom Inc (NYSE:JWN) and Ross Stores Inc (NASDAQ:ROST) to "sell" from "neutral," this morning. The analyst said it was taking a "conservative stance" on the retail sector, adding that it's "increasingly concerned about the impact of potential supply chain disruption resulting from tariff uncertainty." The broker also issued price-target cuts, slashing JWN's price target to $30, and ROST's to $92. Both stocks are trading lower as a result, but a quick bounce could be in the cards.

Calls Have Been Hot Amid JWN's Recent Tumble 

The downgrade has the shares of Nordstrom trading right above their nine-year lows from earlier this month, down 2.6% at $31.37, at last check. The stock has been struggling on the charts since gapping lower in late May, down 38.9% year-over-year, with a recent ceiling appearing at the $34 region.

That being said, JWN could find redemption, if history is any indicator. Data from Schaeffer's Senior Quantitative Analyst Rocky White showed JWN has been one of the best stocks to own on the S&P 500 Index (SPX) in July over the past decade. Specifically, the security has averaged a 7.99% pop in July during the last 10 years, with every return positive.

Options traders have been betting on a bounce. In the last two weeks, 9.93 calls have been purchased for every put on the the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio sits higher than 99% of similar readings from the past year, and despite Goldman's warning, this bullishness is being echoed in today's trading.

So far, over 5,600 calls have crossed the tape, two times what's normally seen at this point. It looks as if new positions are possibly being purchased at the August 40 call, in which case options traders will profit on a move above $40 through August options expiration.

ROST Shares Cool After Last Week's Record High

ROST is trading 2.7% lower at $99.64 today, extending a retreat from its all-time high of $105.31 on June 20. The stock still boasts a 19.6% year-to-date gain, and has been one of the strongest third-quarter stocks on the S&P, looking back 10 years. Data from White shows the retail shares have averaged a third-quarter gain of 9.65% over this time span, with 80% of the returns positive.

Looking at the rest of the brokerage bunch, 10 of the 18 analysts following the stock consider ROST to be a "strong buy," while the other eight say "hold." The consensus 12-month target price of $100.53, however, is right in line with current levels. Should the shares resume their record-setting run, a round of bull notes could create tailwinds.

Ross is seeing some unusual options activity, too. While overall volume is relatively light, 805 puts and 511 calls have already exchanged hands, double the expected intraday amount. The November 100 call and put are most active, but while new positions are being initiated here, it's not entirely clear if the options are being bought or sold.

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