Investors sent shares of FedEx (FDX) fell sharply on Friday after the company previously announced weak earnings and sales. CEO Raj Subramaniam said he expects the economy to enter a “global recession.” Wall Street will expect a different tune from retail stocks com costco (COST) i Darden Restaurants (DRI) ahead of upcoming earnings reports.
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Despite strong fundamentals, Costco stock has been under trading pressure as it tries to hold the 500 level.
Costco stock has a composite rating of 85, helped in part by a high return on capital and several consecutive quarters of double-digit revenue growth. Costco stock also has a relative strength rating of 83 from IBD Stock Checkup, placing it second in its group.
Results for Darden Restaurants, the parent company of Olive Garden, LongHorn Steakhouse and Yard House, will be reported Thursday before the open. The Zacks Consensus Estimate is for adjusted earnings of $1.56 per share, down 11% from the year-ago quarter. Look for revenue to rise 7% to $2.37 billion.
DRI stock looks a little better than Costco as it consolidates near its 40-week moving average. Darden’s relative strength line has started to trend higher after a nice recovery from the lows, but the 40-week line remains a potential resistance level after Darden broke away from the line last month and fight her now
Costco shares fade ahead of results
Costco’s results will be sold after the close on Thursday. Adjusted profit is expected to rise 5% to $4.11 a share, on a 15% rise in revenue to $71.84 billion.
Late last month, Costco reported August sales of $17.55 billion, up 11% from a year ago. Same-store sales rose 8.7% for the month.
Costco shares responded positively when the company reported earnings in late May. The stock rose nearly 6% on heavy volume, although margins were hit by higher transportation and labor costs. Earnings and revenue were better than expected, with adjusted profit rising 2% to $2.91 per share. Revenue rose 16% to $52.6 billion. The company’s total same-store sales rose an impressive 14.9%. On an adjusted basis, same-store sales rose 10.8%.
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Despite strong fundamentals, Costco stock has been struggling to attract buyers after a short-lived break above a 552.81 buy point. Costco quickly visited its 200-day moving average, rallied above the line for four sessions, then abandoned the support level on Tuesday on heavy volume.
FedEx (FDX) also reports Thursday after the close. Shares of FDX were above their 40-week moving average in June as investors cheered its latest earnings report. But sellers hit the stock hard on Friday after the company guided for earnings and revenue below expectations and pulled its outlook.
Gain settings
In the oil and gas sector, ovintive (OVV) reports early Monday. It is forming a handle cup base with an entry of 56.41.
In another part, FactSet Research Systems (FDS) reports early Thursday. It is still trading near a double bottom entry at 448.69, but an alternative buy point at 457.09 is also valid.
Options trading strategy
A basic options trading strategy around earnings using call options allows you to buy stocks at a predetermined price without taking much risk. This is how options trading strategy works.
First, identify the best valued stocks with a bullish chart. Some could be setting up solid foundations at an early stage. Others may have already broken out and are receiving support for the first time at their 10-week lines. Some might be trading pretty close to highs and refusing to give much ground. Costco shares are still far from highs, but another quarter of strong revenue growth could fuel another round of purchases. Avoid long stocks that are too far past the appropriate entry points.
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In options trading, a call option is a bullish bet on a stock. Put options are short bets. A call option contract gives the holder the right to buy 100 shares of a stock at a specified price, known as the strike price.
Put options are for weak performers with bearish charts. The only difference is that an out-of-the-money strike price is just below the underlying stock price. A put option gives the holder the right to sell 100 shares of a stock at a specified price. Take profit when the stock falls below the strike price with a put option.
See strike prices
Once you’ve identified a take-profit setup for a call option, such as FedEx stock, check strike prices with your online trading platform or at cboe.com. Make sure the option is liquid, with a relatively tight bid-ask spread. Look for a strike price just above the price of the underlying stock (out of the money) and check the premium. The premium should ideally not exceed 4% of the underlying stock price at that time. In some cases, an in-the-money strike price is fine as long as the premium is not too expensive.
Choose an expiration date that suits your risk objective. But keep in mind that time is money in the options market. Short-term expiration dates will have cheaper premiums than more distant expiration dates. Buying time in the options market has a higher cost.
See which stocks are in the ranking portfolio
This options trading strategy allows you to take advantage of a bullish earnings report without taking too much risk. The risk is equal to the cost of the option. If the stock goes down in earnings, the most you can lose is the amount paid for the contract.
Costco Stock Options Trading
When Costco closed Thursday at 503.50, a slightly out-of-the-money weekly call option with a strike price of 505 (expiration Sept. 30) had a premium of about $13.80, or 2 7% of the price of the underlying shares at that time.
One contract gave the holder the right to buy 100 shares of Costco at 505 per share. The most that could be lost was $1,380, the amount paid for the 100-share contract.
Taking into account the premium paid, Costco would need to break above 518.80 for the trade to start making money (strike price of 505 plus a premium of $13.80 per contract).
Note that this is not a trade for a smaller portfolio. Buying 100 shares of Costco would cost $50.50.
Follow Ken Shreve on Twitter @IBD_KShreve for more analysis and insights on the stock market
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