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Bruce Frey's Analyst Insights

Options Analyst Writer
Bruce E. Frey II
Author Bio

August 20, 2012 - Sporting Post-Earnings Profits in the Retail Sector

We have all been there. We see a stock jump higher after they report earnings and think we have missed out on a great opportunity in the market. For the buy-and-hold investor this may be the case; but a long-term investor should not really be concerned with short-term fluctuations in price. The short-term investor, on the other hand, has just seen their profits take off without them. In the middle you have options strategies, which allow you to benefit from fluctuations in price even after the stock moves.

Last week a Commerce Department report on retail sales for July showed an increase of 0.8% from the month-earlier level. The broad-based gains were much higher than expected and helped to offset three months of declines. Despite the generally positive report on the sector, some retail companies have reported less-than-stellar earnings this time around.

Department store JC Penney (JCP) posted a quarterly loss that was bigger than analysts had expected for the second quarter. Sales have declined sharply since the company started a new pricing strategy last February. Shoppers were not interested in the new pricing strategy for JC Penney and stayed away from the department store. Despite the earnings report the stock has been pulled up with the rest of the sector.

On the other end of the spectrum we have Estee Lauder (EL). The company recently reported quarterly earnings and sales figures which showed significant growth over the same period of the prior year. The stock posted a nearly 10% gain the day the results were announced. The stock has been able to hold most of those gains so far and could set a new 52-week high in the coming weeks.

Teen retailer Abercrombie & Fitch (ANF) had been on a bearish ride since before its first quarter earnings report back in May. After slashing estimates for the year a few weeks ago, the poor performance for the second quarter was not as bad as analysts had expected and the stock moved higher following the announcement. With the lowered expectations the company has been able to build a positive narrative around its current condition and its share value has been able to improve in the face of falling sales.

Before the Commerce Department report put wind in the sails of the retail sector, direct marketing and specialty retailer Cabela's (CAB) reported a 56% jump in second quarter earnings. Sales of outdoor gear jumped, giving the company revenue a better than 11% bump for the quarter with same store sales increasing 4.7 percent. The stock continued its relentless climb after the announcement. Since hitting a low below $5 in November of 2008, the stock has gained more than 900%.

It looks like retailers of all kinds have been given a boost regardless of their most recent quarterly earnings reports. Many investors consider this a missed opportunity since the stocks have already made their post-earnings moves. There are, however, option strategies which allow investors to generate profits even if the underlying equity slides a bit lower. The strong performance of the sector in the face of uncertain economic data puts some nice premiums in the options of these stocks. With an option spread trade we can sell some of that premium and still have some protection from a potential drop in value of the underlying stock.

A  hedged trade to consider for Cabela's (CAB) would be the December 40/35 bull-put credit spread. In this trade the investor will sell the December 40 puts while buying the same number of December 35 puts for a 65 cent credit or better. The trade generates a 14.9% return over the four months the trade is open, which works out to be a 43.9% annualized return. The stock would have to fall more than 15.1% to cause a problem.

Be certain you fully understand the risk and reward profile of a trade before you put your hard-earned cash to work. If you have comments, concerns, praises or criticisms, please e-mail me at

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