At first glance, the big drop in retailing giant Target (TGT) seems justified. It wasn’t just about missing third-quarter earnings and sales estimates. Management also slashed its full-year guidance, leaving many investors rushing for the exits. For the business week ending Nov. 22, TGT stock gave up more than 19% of equity value. That’s gargantuan for an industry stalwart.
As Barchart content partner Motley Fool mentioned, the shortfall represented “the biggest earnings miss for the company in two years.” Further, the reduction of full-year guidance to $8.60 per share — well below management’s prior target of $9.35 and analysts’ estimate of $9.55 — appeared to body slam investor sentiment.
Of course, what made the matter worse was that big-box retailing rival Walmart (WMT) encountered quite the opposite scenario. One day prior, the company posted earnings per share of 58 cents, beating the consensus view of 53 cents. As well, sales jumped 5.5% to $169.6 billion, beating the consensus view of $167.5 billion.
At the same time, some broader context may be necessary. During the same week, TJX (TJX) posted its Q3 disclosure, beating on both adjusted EPS and sales (albeit narrowly). No, this isn’t to excuse Target and certainly, red ink in TGT stock was to be expected. Still, it’s important to note that the American consumer at large appears to be spending despite significant economic challenges.
In my mind, this framework suggests that TGT stock could be a discounted buying opportunity for the adventurous investor.
Unusual Options Activity in TGT Stock Points to a Contrarian Opportunity
Although the red ink might tempt extreme value hunters, I must warn readers that going long TGT stock appears to be a contrarian move. Sure, on the surface, the pop up on Friday — along with the inclusion in Barchart’s unusual stock options volume indicator — might suggest bullish interest entering the arena. However, it’s a nuanced argument.
After market close on Friday, total volume for TGT stock options hit 231,650 contracts versus an open interest reading of 672,857 contracts. This print represented a 207.4% swing higher from the trailing one-month average volume. Further, call volume clocked in at 165,376 contracts versus 66,274, yielding a put/call volume ratio of 0.4.
On paper, that sounds bullish. However, options represent two-way streets: for every option bought, that same option was sold. To better understand who’s doing what, it’s crucial to check Barchart’s options flow screener, which filters exclusively for big block transactions likely placed by institutional investors.
On Friday, net trade sentiment sat at almost $-15.6 million, favoring the bears. And while most of the bearish transactions appear to be long puts (and thus potentially “negative” wagers), there was a noticeable volume of short calls. So, some of the smart money folks may be betting that TGT stock will not recover.
However, as Barchart columnist Mark Hake pointed out, the selloff could be overdone. He notes that Target didn’t issue a profit warning and that typically, “[t]his kind of drop happens when a company expects not to make a profit.”
For me, I see a similarity to FedEx (FDX). When the courier delivered disappointing results for its fiscal Q1 report, FDX tanked. As it turned out, though, the negativity was priced in. Subsequently, shares have been marching higher. I believe the same situation may play out for TGT stock.
An Interesting Wager to Consider
For the adventurous market participant that likes to play a bit on the wild side, buying Target stock outright might be a solid game plan. You’d be getting an overall strong enterprise that encountered a rough patch. However, for those who want to dial up their speculative juices, a bull call spread might be in order.
To make a long story short, a bull call spread is like buying a call option on discount: you buy a call but you also sell a call at a higher strike price. The credit earned from the short call is used to partially offset some of the debit paid for the long call. Further, if you acquire a near-expiry option, the capped reward “penalty" of this vertical spread is mitigated.
Using Barchart’s Expected Move calculator, the platform’s algorithm anticipates that on the high end, TGT stock may hit $127.87 by the option chain expiring Dec. 20. Using this as a frame of reference, you could potentially consider buying the 120/125 call spread.
If $127.87 is a realistic target, then hitting $125 should be doable. By putting $237 at risk, you stand the chance of earning $263 or a payout of just under 111%. That’s not bad at all for a period lasting no longer than one month.
