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Michael Fowlkes' Analyst Insights

Options and ETF Analyst Writer
Michael Fowlkes
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November 28, 2016 - Dollar General Reports Earnings on December 1

What's Happening

Discount retailer Dollar General (DG) will report Q3 results December 1. The company will announce its quarterly numbers before the market open, with the consensus calling for earnings of $0.93 per share, on revenue of $5.37 billion. During the same period last year the company earned $0.86 on sales of $5.07 billion. DG shares have risen 10.7% on the year.

Technical Analysis

DG was recently trading at $79.55, down $17.33 from its 12-month high and $16.02 above its 12-month low. Technical indicators for DG are bearish and the stock is showing signs of a possible trend reversal. The stock has recent support above $76.05 and recent resistance below $80.35. Of the 21 analysts who cover the stock, nine rate it a “strong buy”, two rate it a “buy”, nine rate it a “hold, and one rates it a “strong sell”. The stock receives S&P Capital IQ’s 4 STARS “Buy” ranking.

Analyst's Thoughts

Dollar General was among the stocks to rally following the presidential election. The stock has risen 14.1% since Trump’s surprising victory. Despite the strong upward move, the stock’s valuation remains OK, with a P/E of just 18.6, and earnings forecast to rise 13.4% this year, and 8.2% next year. In August, the stock took a major hit after the company posted weaker-than-expected second-quarter results, but analysts do not expect to see another miss this quarter. The street has a slightly higher whisper number of $0.94, a penny above the consensus. With Trump winning the presidency and Republicans now in control of both houses of Congress, the expectation is for improvements in the overall economy, which will likely benefit all retailers, and is the primary reason why shares of DG have made such an impressive gain since election night. If Dollar General is able to top estimates, there is upside based on the current valuation and general bullishness on retailers, but shareholders should have an exit plan in place just case results are weaker than expected.

Stock Only Trade

If you're looking to establish a long stock position in DG, consider buying the stock under $80.00. Sell if it falls below $72.00 or take profits if it gets to $92.00.

Bullish Trade

If you want a bullish hedged trade on the stock, consider a January 65/70 bull-put credit spread for a 30-cent credit. That's a potential 6.4% return (40.2% annualized*) and the stock would have to fall 11.6% to cause a problem.

Bearish Trade

If you want to take a bearish stance on the stock at this time, consider a February 87.50/90 bear-call credit spread for a $0.30 credit. That's a potential 13.6% return (57.9% annualized*) and the stock would have to rise 10.4% to cause a problem.

Covered Call Trade

If you like the stock, but wish to lower your cost basis on a new position, you may want to consider a January $80.00 covered call. Buy DG shares (typically 100 shares, scale as appropriate), while selling the January $80.00 call for a debit of $76.25 per share. The trade has a target assigned return of 4.9%, and a target annualized return of 31.5% (for comparison purposes only).

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