Upgrades Could Jolt This Retail Stock Higher

Analyst sentiment has been overwhelmingly bearish on M stock

Apr 3, 2018 at 10:37 AM
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Retail giant Macy's Inc (NASDAQ:M) recently soared to a fresh annual high in late February, and the stock's pullback from this peak culminated last week in a sharp bounce from the $27 level. This area had previously acted as resistance since the stock's May 2017 bear gap, but now seems to have switched roles to act as support. M has already gained 18% year-to-date, but with plenty of pessimism lingering in the background that could unwind to fuel future gains, now is an opportune time to bet on the retail stock's next leg higher.

WKALT M Chart March 29

 

Despite the stock's strong price action, skeptical analysts are still making their mark. Of the 12 firms covering the shares, 11 continue to maintain a "hold" or "sell" rating, leaving the door open for upgrades to draw more buyers to the table.

Digging deeper, the April options series for Macy's stock features heavy put open interest at a number of out-of-the-money strikes, which should act as potential short-term support. This put-heavy skew is echoed by the stock's Schaeffer's put/call open interest ratio (SOIR) of 2.14, ranking in the 97th annual percentile. This elevated ranking shows short-term options traders have rarely shown a greater preference for puts over calls in the last year.

What's more, short interest rose 22% over the past two reporting periods, and now represents 17.2% of the stock's total available float. At the security's average trading volume, it would take nearly a week for shorts to cover their bearish bets, leaving M well-positioned to benefit from short-covering in the weeks ahead.

Now is a good time to bet on more upside via the stock's options, considering M's Schaeffer's Volatility Index (SVI) of 40% ranks in the 20th annual percentile. This suggests that relatively low volatility expectations are being priced into short-term contracts at the moment.

Subscribers to Schaeffer's Weekend Trader Series options recommendation service received this M commentary on Sunday night, along with a detailed options trade recommendation -- including complete entry and exit parameters. Learn more about why Weekend Trader is one of our most popular options trading services.
 

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