Traders are not always rational, and that statement seems to be
especially true duringearnings season . Millions, and at times
billions, of dollars in stockmarket value are often lost in seconds
when a company misses analysts' estimates forearnings by a small
amount.
When apparel and footwear maker
VF Corp. (
VFC
)
, which owns brands like North Face, Lee and Wrangler, announced
its quarterly results a few weeks ago, the company met analysts'
earnings estimates but missed on the revenue side. The price
sell-off that small revenue miss sparked looks like it was
irrational when the earnings and outlook for the company are
considered.
In October, the company reported that its third-quarter earnings
jumped 23%, to $3.52 per share, from the year-ago quarter, about 3
cents above the consensus forecast. The company also raised its
guidance for the full year and raised itsdividend by more than 20%.
Unfortunately, VFC missed revenue expectations and reported that
sales grew 11% to $3.1 billion from the year-ago period, missing
analysts' expectations by 0.01%.
On the morning of the report, VFC gapped down, and had declined
about 8% in the week after the report. Traders took more than $1.5
billion off themarket cap of VFC because its revenue fell $20
million short of estimates. Since then, traders seem to be
reassessing the company. VFC has formed a base during the past
month and looks like it is ready to move higher.
VFC has now moved back to the resistance level formed by the
downside gap. Thestochastics indicator offers another reason for
bullishness on the daily chart shown above and the weekly chart
(not shown). It seems likely that traders could push VFC back to
its52-week high near $170 before the nextearnings announcement ,
which is due in February.
Buying the stock near the recent price level at about $162 would
result in a 5% gain if VFC does set a new high. Although that is an
acceptable rate of return for a three-monthholding period , the
high price of the stock means we would need to commit a large
amount of capital toprofit from that move.
Rather than buying 100shares of VFC for more than $16,000, we
could use February $150call options to participate in the trade
with less than 10% of that amount. These calls would be worth at
least $20 if VFC reaches $170. They are currently trading at about
$14.20, which offers a potential gain of 41%.
The risk on the trade can be limited to about the same dollar
amount whether the stock or options are used. Traders buying VFC
should use a stop-loss of $155, risking about $7 per share. That
same amount of risk, about $7.50 per share, works well with the
February options.
VFC has a large collection of name brands and has leveraged a
growing product line into steady earnings growth. This is a stock
that could be attractive to long-term investors.
In their last earnings conference call, management told
investors to expect long-term earnings growth to average about 12%
a year going forward. The stock also provides adividend yield of
about 2%. Long-term investors may consider the recent sell-off to
be a buying opportunity, and this trade would benefit in the short
term from their buying, which would drive the price up.
Action to Take -->
Buy VFC at themarket price . Set stop-loss at $155. Set
initialprice target at $170 for a potential 5% gain in three
months.
Buy VFC Feb 150 Calls at $15 or less. Set stop-loss at $7.50.
Set initial price target at $20 for a potential 33% gain in three
months.
This article originally appeared on TradingAuthority.com:
This Trade Could Make You 6x Shareholders'
Returns