Value hunt continues in retail space

Is retail so bad it’s good? Some traders seem to think so.

Sure, by many measures the industry is in crisis. Smaller merchants have gone bankrupt, larger ones are shuttering stores at a record pace, and stock prices have taken a beating.1 But in a market where so many other stocks are at record highs, there have been signs of value hunting in the retail sector.

Shoe hawker Skechers USA (NYSE: SKX), for instance, has been pushing higher amid analyst upgrades and bullish options activity. Yesterday also brought a positive rating change to apparel chain Gap (NYSE: GPS), which has been trying to hold support at recent lows.2

Also noteworthy on Monday was the call volume in department-store operator JC Penney (NYSE: JCP), which routinely ranks among the most actively traded consumer names.3 Buyers went to work about an hour into the session, pocketing the August 6 calls for $0.15. They kept nibbling into the next hour as premiums rose to $0.17 and then as high as $0.19. Almost 22,000 contracts changed hands by the closing bell.

Calls fix the price where investors can buy a security. They can leverage gains if a stock climbs but also become worthless if no rally occurs. The August 6 calls will double in value if JCP rises 27 percent to $6.30 by expiration, and triple from a 30 percent bounce to $6.45. It stays below $6, and they'll zilch out.

JC Penney (JCP), 6-month chart

Source: OptionsHouse by E*TRADE

JCP rose 0.41 percent to $4.91 yesterday, and has lost 41 percent of its value this year. Traders played some of the downside by amassing puts (the bearish inverse of calls) a month ago. They tripled their money after quarterly results missed, but the shares have been clawing their way back from record lows since. 

There are at least two ways to explain this week’s bullish activity. First, short interest (bets against the stock) account for about one-third of JCP’s float.4 That can trigger violent “squeezes” higher – albeit brief. So, Monday’s call buyers may simply be short sellers looking to hedge their positions.

Alternately, they may see opportunities for a rebound. Some experts think the glass is half full and have faith in management’s turnaround strategy. They’re especially hopefully that strong April sales weren’t a mere blip on the radar.5

Veteran traders also know that stocks don’t move in straight lines, and that bounces can occur when lots of bad news is priced in. They’re perfectly aware that earnings – a potentially negative catalyst – have passed. They also know consumer data has been strong, just as last year’s nightmare holiday shopping season fades from memory.6

Bottom line: Retail has been one of the weakest areas in the market, but there are signs that a hunt for value has begun.


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1. 22 Large Retailers Besides J.C. Penney Are Closing Waves of Stores. 6/4/17. Dire predictions for retail stoked by another bad week full of store closures and a looming bankruptcy. 6/2/17.

2. Benzinga: Can The Gap Pick Up Market Share Up For Grabs By Department Store Closings? 6/5/17.

3. Data based on WEX Trading Platform and OptionsHouse by E*TRADE platform.

4. Yahoo Finance: Key Statistics for J. C. Penney Company, Inc. 6/5/17.

5. Bank of America: 1Q comp miss but EPS beat; a tough but manageable road ahead. 5/12/17. JC Penney (press release): JCPENNEY REPORTS FIRST QUARTER 2017 FINANCIAL RESULTS AND REAFFIRMS FULL YEAR GUIDANCE. 5/12/17.

6. RTTNews: U.S. Consumer Sentiment Improves More Than Expected In May. 5/12/17.