Specialty retail seeks to plug gaps, challenge highs
03/28/18

As of yesterday, while a rebounding S&P 500 (SPX) was still down more than 1.5% over the most recent five trading days, the top three S&P sectors were Energy, Utilities, and Consumer Discretionary. Although Consumer Discretionary as whole wasn’t in the green, the Specialty Retail industry was holding its own better than most of the sector, having scratched out a small gain over the past five days.

Discount specialty retailer Dollar Tree (DLTR), purveyor of everything $1, has one of the more interesting price charts you might see. It’s recently hugged the top (around $95.75) of the consolidation it formed after its sharp sell-off on March 7, when the company missed on both Q4 earnings and revenue, and lowered its guidance. It looks like something came in and took a bite out of the price action:

Dollar Tree (DLTR) 8/9/17–3/27/18. DLTR daily price chart, price gap

Source: OptionsHouse


The top of the current consolidation is around $6 below the low of the larger trading range the stock gapped below on March 7. But after trading as low as $86.85 that day, the stock jumped around $10 over the next few days, formed a higher low last Friday (the second of the S&P’s 2% down days), then returned to the top of the consolidation this week.

Although there are few market adages that hold less water than “gaps were meant to be filled” (look at that up gap from last August, for instance), DLTR’s proximity to the down gap, the upward bias of its consolidation pattern, and the fact that the specialty retail industry has exhibited relative strength during the recent market correction puts Dollar Tree in an interesting position.

Although some analysts dropped their price targets in the aftermath of the March 7 earnings release, the revisions by Deutsche Bank and RBC Capital appeared representative of a bigger picture: DB lowered its target from $137 to $119, while RBC dropped its from $129 to $1061—both levels still well above the stock’s current price. The following analyst target graph (logon required) shows the average price target is close to $110:

Dollar Tree (DLTR) 3/27/18. Dollar Tree (DLTR) analyst price targets

Source: E*TRADE


More recently, Piper Jaffray upgraded DLTR from neutral to “overweight” and raised its target to $112.2 Given the stock’s relatively limited downside risk—assuming a move below one of the two most recent swing lows would negate a bullish outlook—and its industry’s recent strength, some traders may be looking to see if the stock can close some or all of that gap in the near future.

Options Activity Alert: Another specialty retailer, teen/pre-teen discounter Five Below (FIVE), had some bullish-looking options activity early yesterday, showing up in LiveAction scans for unusual call options volume (more than twice its average) and highest put/call ratios (below). The stock, which more or less shrugged off last week’s downturn, topped $72 yesterday and is just a little shy of the $73.55 record high it hit on January 5. It beat on both earnings and revenue when it released its most recent quarterly numbers on March 21.

Five Below (FIVE) 3/27/18. Dollar Tree (DLTR) high call/put ratio

Source: OptionsHouse


 

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1 StreetInsider. Dollar Tree Inc. (DLTR) Earnings. 3/26/18.

2 TheFly.com. Dollar Tree upgraded to Overweight from Neutral at Piper Jaffray. 3/26/18.