Home Depot, Walmart Kick Off Busy Week Of Retail Earnings; Tech Investors Eye Results from Cisco, Nvidia, AMAT

Dow Jones stocks Home Depot (HD) and Walmart (WMT) headline a busy week of retail earnings reports as Wall Street weighs the impact of higher interest rates on the economy.

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Big box retailer Walmart surged above its 200-day moving average last month and has been holding gains well. Meanwhile, home improvement giant Home Depot jumped above its 200-day line Thursday in heavy volume after the October consumer price index showed cooling inflation.

Walmart’s earnings report is due Tuesday before the open. WMT stock gapped up sharply Aug. 16 after the company reported adjusted profit of $1.77 per share, down 1% year over year, but above the $1.62 consensus. Revenue growth accelerated for the second straight quarter, up 8% $152.9 billion. Revenue exceeded consensus by about $2 billion.

CFO John David Rainey said the retail giant has been seeing increased traffic from middle- and higher-income customers seeking relief from stubbornly high inflation. He noted that three-quarters of Walmart’s market share gains came from customers with annual household incomes of at least $100,000. Inventories rose nearly 26% in the quarter.

For the current quarter, Zack’s Investment Research is forecasting an adjusted profit of $1.31 per share, down 10% year over year. Revenue is seen rising 5% to $147.4 billion.

Home Depot Surges Ahead Of Results

Despite a weak housing market, Home Depot is expected to deliver another quarter of top and bottom-line growth. The retailer also reports early Tuesday.

HD stock surged Aug. 16 after the company reported better-than-expected fiscal second-quarter results. Adjusted profit increased 11% to $5.05 per share, with revenue up 7% to $43.8 billion. The results were helped by continued strong demand for home-improvement projects. Same-store sales rose 5.8%, above the 4.9% consensus.

Like Walmart, Home Depot is also stuck with bloated inventories, which rose more than 35% year over year.

HD stock has a modest 76 Composite Rating, weighed down by slowing earnings growth in recent quarters, and a 64 Relative Strength Rating. The stock’s three-month RS Rating looks better at 82.

Retailers Lowe’s (LOW), Target (TGT) and TJX Companies (TJX) report early Wednesday. Lowe’s also gapped above its 200-day line Thursday, but volume was light. Target is still below its 200-day line. TJX looks the best of the three, topping a 73.11 entry Thursday in light turnover.

BJ’s Wholesale Club (BJ) is one of the better looking retailers in terms of price performance. It’s still in a buy zone after clearing a shallow cup-with-handle base with a 78.93 buy point. Results are due Thursday before the open, along with Kohl’s (KSS) and Macy’s (M).

Tech Earnings

Several high-profile technology stocks are also on the earnings calendar.

Cisco Systems (CSCO) and Nvidia (NVDA) report Wednesday after the close. Results from chip-equipment firm Applied Materials (AMAT) and security software firm Palo Alto Networks (PANW) are due Thursday after the close. All four stocks are below their 200-day lines, which means overhead supply could be an issue.

Options Trading Strategy

A basic options trading strategy around earnings — using call options — allows you to buy a stock at a predetermined price without taking a lot of risk. Here’s how the options trading strategy works and what a recent Home Depot option trade looked like.

First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Others might have already broken out and are getting support at their 10-week moving average for the first time. And a few might be trading tightly near highs and refusing to give up much ground. Avoid extended stocks that are too far past proper entry points.

HD stock could be a candidate for a call-option trade after retaking its 200-day line.

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In options trading, a call option is a bullish bet on a stock. Put options are bearish bets. One 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.

You earn profits when the stock falls below the strike price with a put option.

Check Strike Prices

Once you’ve identified an earnings setup for a call option, check strike prices with your online trading platform, or at cboe.com. Make sure the option is liquid, with a relatively tight spread between the bid and ask.

Look for a strike price just above the underlying stock price (out of the money) and check the premium. Ideally, the premium should not exceed 4% of the underlying stock price at the time. In some cases, an in-the-money strike price is OK as long as the premium isn’t too expensive.

Choose an expiration date that fits your risk objective but keep in mind that time is money in the options market. Near-term expiration dates will have cheaper premiums than those further out. Buying time in the options market comes at a higher cost.

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This options trading strategy lets you capitalize on a bullish earnings report without taking too much risk. Risk is equal to the cost of the option. If the stock gaps down on earnings, the most you can lose is the amount paid for the contract.

Home Depot Option Trade

Here’s what a recent call option trade looked like for Home Depot.

When Home Depot traded around 311.70, an out-of-the-money weekly call option with a 315 strike price (Dec. 9 expiration) came with a premium of around $9.75, or 3.1% of the underlying stock price at the time.

One contract gave the holder the right to buy 100 shares of HD stock at $315 per share. The most that could be lost was $975 — the amount paid for the 100-share contract.

When taking the premium paid into account, Home Depot would have to rally past 324.75 for the trade to start making money (315 strike price plus $9.75 premium per contract).

An in-the-money call option using a 310 strike price (Dec. 9 expiration) offered a premium of $12.35, or 4% of the stock price at the time.

Follow Ken Shreve on Twitter @IBD_KShreve for more stock market analysis and insight

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