TJX Q3 Earnings Preview / Trade Ideas

by Dan November 17, 2020 1:54 pm • Trade Ideas

TJX will report its Q3 earnings tomorrow before the open. The options market is implying about a 5% move in either direction or about $3.10, which is essentially inline with the average one-day post-earnings move over the last four quarters.

Shares of TJX have lagged many of its retail peers, unchanged on the year vs the XRT, the S&P Retail etf up about 22% YTD. Despite the underperformance, Wall Street analysts are nearly universally bullish on the stock with 25 Buy ratings, 2 Holds and only 1 Sell with an average 12-month price target of $64.40 only about 5% away from current levels and just below its all-time highs.

The stock has technical resistance between the recent high near $63 and its all-time high made in February near $65 and technical support between its recent low near $50 earlier this month and its 6 month low made in mid-May near $48.50:

 

The stock gapped 15% Monday before last on the Pfizer (PFE) covid vaccine news and has since held most of those gains on the heels of Moderna’s (MRNA) vaccine news yesterday. The fact of the matter is though that our population will not have access to this vaccine until Spring at the earliest, this at a time when consumers who have job or wage insecurity are started to get stretched as many are in need of further fiscal stimulus as we are close to 4 months since expanded unemployment benefits have run out from the aid package passed in March. Off-priced retailers like TJX will do very well on the other side of the virus, but in the meantime, they are not participating with some other retailers who have been able to shift to an omnichannel approach as their inventory does not lend itself well to e-commerce, the costs associated with running stores with very limited product engagement (no try ons) and lines of people to get in given capacity limits will continue to hurt eps and sales.

So what’s the trade?

If the company were to post a disappointing quarter and guide down for Q4 then I could see a gap fill back to the mid $50s.

But if a bad Q3 comes with a cautiously optimistic Q4 outlook then the stock is going to rip.

If I were inclined to play for a miss and a guide lower I might consider a put spread in Nov weeklies, targeting a gap fill back towards $55:

Bearish Trade Idea: TJX ($60.70) Buy Nov 60 – 55 put spread for $1

-Buy to open 1 Nov 60 put for 1.25

-Sell to open 1 Nov 55 put at 25 cents

Break-even on Nov expiration:

Profits of up to 4 between 59 and 55 with max gain of 4 at 55 or lower

Losses of up to 1 between 59 and 60 with max loss of 1 above 60

Rationale: this trade idea risks less than 1.7% of the stock price, breaks-even 2.8% with a max gain of nearly 6.5% if the stock is down 9.4% by Friday’s close.

Or

If I were inclined to play for better than expected Q4 guidance then I might target the prior all-time high, near $65 with a call spread in weekly options, for instance:

Bullish Trade Idea: TJX ($60.70) Buy Nov 61 – 65 call spread for $1.10

-Buy to open 1 Nov 61 call for 1.40

-Sell to open 1 Nov 65 call at 30 cents

Break-even on Nov expiration:

Profits of up to 2.90 between 62.10 and 65 with max gain of 2.90 at 65 or higher

Losses of up to 1.10 between 61 and 62.10 with max loss of 1.10 below 61

Rationale: this trade idea risks less than 2% of the stock price, breaks-even up 2.3% with a max gain of nearly 5% if the stock is up 7% by Friday’s close.

 

Regular readers know that I am not a big fan of short-dated long premium directional trades into events like earnings, you need to get a lot of things right to merely breakeven, first and foremost direction, then magnitude of the post-event news, and of course timing.

I DO LIKE CALENDARS though… for instance, if you thought the stock will move in one direction, possibly in line with the implied move, which oftentimes lines up with technical resistance or support, then look to sell short-dated out of the money premium to help finance longer-dated options of the same strike, for instance, if I thought the stock would pop, and find resistance near $65 this week, but I think the stock could be on the cusp of a massive breakout in the new year I might consider a Nov – Jan Call Calendar, targeting the prior high of $65, for instance:

Bullish Trade Idea: TJX ($60.70) Buy Dec – April 65 call calendar for $2.50

-Sell to open 1 Dec 65 call at $1.10

-Buy to open 1 Apr 65 call for $3.60

Break-even on Dec expiration:

The ideal scenario is that the stock is very near 65, the short Dec 65 call will expire worthless or covered for pennies and left long the April 65 call which will have gained in value as the stock moved higher offsetting decay. In this scenario, I am left long the Apr 65 call for $1.10 less than I would have paid now and have the optionality of turning again into a calendar or possibly a vertical call spread in April.