Analyst: Sell These Retail Stocks Before the Holiday Season

Options traders are circling GPS, LB, and M stocks as the shares sink

Oct 18, 2019 at 12:02 PM
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Credit Suisse weighed in on the retail sector today, downgrading a trio of stocks to "underperform" from "neutral" amid expectations for a sluggish holiday season. Specifically, the analyst firm cut its ratings on Gap Inc (NYSE:GPS), Victoria's Secret parent L Brands Inc (NYSE:LB), and department store concern Macy's Inc (NYSE:M), and slashed their price targets to new-low territory. As such, the shares of GPS, LB, and M are plummeting today, and options traders are rushing the retailers.

Analyst Sees 20% Downside for Gap Stock

Credit Suisse dropped its price target on Gap stock to $14 from $20 -- in territory not charted since the early 2009 post-financial-crisis bottom. From GPS shares' close of $17.57 yesterday, that new target represents an expected drop of 20%.

Already today, the equity has fallen 5.8% to trade at $16.55, on pace for its worst session since August, when the shares were trading near eight-year lows. GPS is down nearly 36% already in 2019, with recent rebound attempts stopped by its 100-day moving average.

So far today, about 1,200 call and 1,500 puts have changed hands -- roughly twice the average intraday pace. It appears some eleventh-hour betters may be buying to open the October 16.50 put -- the most active option so far today -- expecting more downside before the options expire at today's close.

Today's appetite for Gap puts is a change of pace for the retail stock, though. On the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 1.35 calls for every put during the past 10 sessions. The 10-day call/put volume ratio registers in the 85th percentile of its annual range, pointing to a healthier-than-usual appetite for long calls over puts during the past two weeks.

L Brands Stock Attracts Option Bear

Credit Suisse dropped its price target on L Brands shares to $14 from $22 -- again, in territory not explored since 2009. From LB's close of $18.10 yesterday, the new target represents expected downside of almost 23%.

LB stock has surrendered 7.7% to trade at $16.71 today, and is within a chip-shot of its Sept. 3 decade low of $15.82. The security has been in freefall mode since touching a record just shy of $100 in late 2015, with recent rebound attempts stalling at its 200-day moving average. So far in 2019, LB is down 35%.

The Victoria's Secret parent has already seen nearly 4,000 calls and 2,800 puts traded -- far surpassing its average daily volume of roughly 1,600 calls and fewer than 800 puts. Most active are the November 15 put and 17.50 call, in what appears to be related spread activity.

It's possible one trader bought to open several blocks of the 15-strike put options, and partially funded the position by selling to open the 17.50-strike calls. If so, the goal is for LB shares to retreat beneath the $15 level, with maximum risk coming on a bounce back above $17.50, upon which the sold calls would move into the money.

Analysts, Option Trader Expects New Lows for Macy's Stock

Finally, Credit Suisse slashed its price target on Macy's stock to $12 from $19 -- a level not touched in more than 10 years. From the equity's close of $15.78 yesterday, that new target represents a 24% discount.

M shares have fallen 4.5% to $15.07 today. The stock has given up nearly half its value in 2019, and has struggled to recover after a big bear gap in August. In fact, the equity touched a multi-year low of $14.11 earlier this month, and its recent run-in with the 40-day moving average could be a bearish signal for the stock, if past is prologue.

Macy's options volume is running at three times the average intraday pace, with about 20,000 calls and 25,000 puts traded already. The weekly 11/22 11.50-strike put is most popular, and it appears one trader bought to open a block of 7,000 contracts for 15 cents each, or about $105,000 (number of contracts x 100 shares per contract x premium paid).

If so, the buyer will profit if M shares move south of $11.35 (strike minus premium paid) by the close on Friday, Nov. 22, when the weekly options expire. That option could encompass Macy's next earnings release, tentatively slated for Nov. 21.



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