This Stock Could Make a Big Move, Next Month
This is an important time of year for a number of stocks. Many companies are pushing their sales reps to meet important targets. Others are leaning on managers to boost production or to cut costs. All of these efforts could show up in a company’s fourth quarter financial statements.
While pressure to deliver promised results can be strong in many companies, it can be especially strong in the retail sector where many companies experience a spike in sales associated with holiday shopping. Even customers who don’t celebrate the holidays often shop for retail bargains at this time of year.
This trend can be seen in the chart of Target Corporation (NYSE: TGT) below. This chart shows revenue by quarter and there is a spike in the fourth quarter every year that shows the quarter’s importance to the company.
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Source: Standard & Poor’s
Good News and Bad News for Target
While this quarter is undoubtedly important for the company, there is no way to accurately forecast the performance of the company in advance. The data is decidedly mixed for the company.
Arguably the most important metric for any retail store is same-store sales, a measure of sales growth at stores that have been open for at least one year. In the most recent quarter, Target reported that traffic in its stores grew by 1.4% and comparable sales increased 0.9%.
Growth is important although higher growth would be a more bullish indicator for TGT.
Target faces a number of challenges as it seeks to increase sales. One is competition from competitors that include retail giants Walmart and Amazon. Both of these companies can, and do, compete fiercely on prices.
But, Target can beat Amazon on convenience since its stores are accessible from almost everywhere. The company also has a reputation for a high level of customer service and fashionable items, which help it compete against retail stores like Walmart.
A Plan for Success
The company’s CEO, Brian Cornell, has outlined a turnaround plan, and execution appears to be on track.
“We’re investing in our business with a long-term view of years and decades, not months and quarters,” Cornell said in a nutshell. “We’re putting digital first and evolving our stores, digital channels and supply chain to work together as a smart network that delivers on everything guests love about Target, including more than a dozen new brands we’ll introduce over the next two years.”
For the purpose, he’s earmarked $7 billion for capital expenses over the next three years and a billion more in operating profits, beginning in 2017.
The company has also added RFID (radio frequency identification) tags to retail apparel to quickly locate in-store inventory. It is also remodeling the stores, to support delivery of orders taken online.
Target is introducing new technology in stores that will allow store employees to check inventory, take orders, process payments through a mobile point-of-sale system and arrange delivery. The company also invested in its digital infrastructure to increase its web site speed, stability, performance and capacity.
Meanwhile, management negotiated a deal with Pinterest that could attract more users and expanded a relationship with Google Express (an ecommerce shipping service with no subscription charges and free shipping depending on order size) in select markets across New York and California.
It has now announced that Target products can be purchased via Google Express across the country. That means next year, Google Home, Android and iOS smartphones and smart TVs that come with Google Assistant, can also be used to shop Target using voice commands.
This all builds on Target’s success online. The company’s digital sales have grown strongly every quarter, doubling between 2013 and 2016. However, earnings per share have been declining. The stock price has too and now pays a dividend yield of about 4%. Now, the stock offers value and could deliver gains soon.
The Stock Price Is Likely to Break Out Soon
After completing so many actions designed to improve earnings, the results should be known after this holiday season. That means the stock could break out of its trading range soon.
One options strategy that benefits from a stock in a trading range is an iron condor. This strategy has the added benefit of carrying limited risk.
To open an iron condor trade, the investor sells one call while buying another call with a higher exercise price and sells one put while buying another put with a lower exercise price. Typically, the exercise prices of the calls are above the market price of the stock and the exercise prices of the put options are below the current price of the underlying stock.
In an iron condor, the difference between the exercise prices of the two call options will be equal to the difference between the exercise prices of the two put options. The final requirement for this strategy is that all of the options must have the same expiration date.
The risks and potential rewards of the strategy are shown in the following diagram.
Source: The Options Industry Council
The maximum gain on this trade is equal to the premiums received when the position is open. The maximum risk is equal to the difference in the two exercise prices less the amount of the premium received when the trade was opened.
Opening an Iron Condor in Target
For Target, the trade can be opened using the following four options contracts:
As you see, all of the options expire on the same day, Friday, January 19.
The difference in the exercise prices of the calls or puts is equal to $2.50. Since each contract covers 100 shares of stock, this means the maximum risk on the trade is equal to $250 less the premium received when the trade was opened.
Selling the options will generate $1.30 in income ($1.00 from the call and $0.30 from the put). Buying the options will cost $0.65 ($0.50 for the call and $0.15 for the put). This means opening the trade will result in a credit of $0.65, or $65 for each contract since each contract covers 100 shares.
The maximum risk on the trade is equal to the difference in strike prices ($2.50) minus the premium received ($0.65). This is equal to $1.85, or $185 since each contract covers 100 shares. Many brokers will require a margin deposit equal to the amount of risk. That means this trade may require just $185 in capital.
The maximum gain on the trade is the amount of premium received when the trade is opened. In this case, that is $1.30 or $130 per contract.
The potential reward on the trade ($130) is about 70% of the amount risked, a high potential return on investment for a trade that will be open for less than one month. If a trade like this is entered every month, a small trader could quickly increase the amount of capital in their trading account.
The iron condor is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that should be lower than owning the stock.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.