Retail stocks underwent a bit of a renaissance this past month. Solid earnings from key players like Kohl’s Corporation (NYSE:KSS) and TJX Companies Inc (NYSE:TJX) have helped bolster sentiment within the group. Still, as Target Corporation (NYSE:TGT) showed earlier this week, you still have to be selective.
For today’s trading idea, I’m turning my attention to KSS stock. As the company’s earnings report recently proved, Kohl’s is not just my wife’s favorite clothing retailer. With consumers becoming increasingly selective about where they shop, Kohl’s has hit the sweet spot.
The company not only beat earnings and revenue expectations, same-store sales also rose more than expected. And the kicker … Kohl’s raised its full-year earnings outlook to $5.05 to $5.50 per share from $4.95 to $5.45 per share.
As a company Kohl’s has proven that you can make gains in a retail sector increasingly dominated by Amazon.com, Inc. (NASDAQ:AMZN). That said, KSS stock’s price action and analyst sentiment have not kept up.
For instance, Thomson/First Call reports that seven of the 21 analysts following KSS stock rate the shares a “buy” or better. The 12-month consensus price target comes in at $69.76 — just 8% above KSS stock’s current perch.
As such, the shares stand a good chance of upgrades or price target increases.
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Technically, KSS stock has been range-bound for the better part of the past five months. The shares have trended between support at $57.50 and resistance at $67.50. KSS’ 50-day moving average has played spoiler recently, but the shares recently regained this trendline following earnings.
It’s a good sign for KSS stock, and the shares appear poised to once again challenge $67.50. The problem is that it may take a shift in ratings from the brokerage community to push the shares beyond this technical threshold.
Turning to KSS options, we find more room for improvement. Currently, the June put/call open interest ratio rests at 0.77 — a relatively high reading given Kohl’s solid quarterly report.
Surprisingly, June implied volatility is pricing in a potential move of about 5% for KSS stock heading into expiration. This places the upper bound of the expected move at $67, while the lower bound lies at $61.
2 Trades for KSS Stock
Call Spread: Traders looking to bet on a continued rally for KSS stock might want to consider a June $65/$66 bull call spread. At last check, this spread was offered at 35 cents, or $35 per pair of contracts.
Breakeven lies at $65.35, while a maximum profit of 65 cents, or $65 per pair of contracts, is possible if KSS stock closes at or above $66 when June options expire.
Put Sell: For a more neutral-to-bullish play, the June $57.50 put should stay well out of the money. This put was last bid at 29 cents, or $29 per contract. As always, the upside to this put sell strategy is that you keep the premium as long as KSS stock closes above $57.50 when June options expire.
The downside is that if KSS trades below $57.50 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $57.50 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
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