Tuesday, November 20, 2012

DLTR: Price rise

Dollar Tree Inc. (DLTR) beat earnings estimates by a 39% last week, kicking off a price rise in the stock that on Tuesday broke past its high point of the past 20 days.

The purveyor of cheapness has been in a downtrend from $58.62 on June 20 and hit a swing low of $37.12 on Nov. 9.

Past that, until the earnings announcement, the price drifted sideways for three days.

The 20-day high breakout was $40.97, a resistance level that was the peak of a brief late-October correction to the upside.

DLTR showed an uptrend for four of the five days leading to the breakout, and the total price rise for those five days was $2.74. To set that number in perspective, it amounts to the distance DLTR's price typically travels in two days plus an additional two hours of trading.

My trend score for those five days is 1.9 -- the price rise adjusted for the persistence of the trend.

The next upside resistance is far away, at $49.57.

Dollar Tree, headquartered in Chesapeake, Virginia, operates 4,400 stores, operating also as Dollar Bills, in the United States and Canada. Everything sells for a dollar.

I find it fascinating to roam the aisles trying to figure out what characteristics allow items to go for so little, concluding in most cases that you get what you pay for. I once bought a watch there that died on my wrist after a day of floating in a sheen of Japanese summer sweat.

Analysts show little love for Dollar Tree -- maybe they bought watches there, too. The enthusiasm index stands at a negative 11% today, compared to a positive 21% two months ago.

Which seems contrarian. Dollar Tree's return on equity is 37%, and it has been at that super high range for at least three quarters. Long-term debt is fairly low, at 16% of equity, and has been typically low for at least three quarters.

So I can't argue that the analysts haven't caught up with the company's current situation. It has been making money for awhile.

Another story that might lend a negative twist to Dollar Tree's futures is the idea that as the economy's recovery strengthens, people will move upscale for Dollar Tree.

Like all retailers, DLTR's earnings peak in the 4th quarter, covering the Christmas shopping season. The 4th qarter of 2011, reported in February of this year, beat the prior 4th quarter significantly. The last 12 quarters have all been profitable and have produced earnings surprises to the upside.

Institutions own 82% of shares but the price is only slightly above par. It takes $1.30 in shares to control a dollar in sales.

DLTR trades 4.9 million shares a day on average. The inventory of option strike prices is fairly thin, with most set at $2.50 intervals. Open interest runs in three and four figures near the money, and the front-month at-the-money bid/ask spread is 5%.

Implied volatility stands at 28%, near the floor of the six-month range. Traders are pricing in confidence that nearly two-thirds of trades will fall between $37.97 and $44.53 over the next month, for a potential gain or loss of 8%, and between $39.68 and $42.82 over the next week, for a gain/loss of 4%.

Trade in call options is quite active today, with volume running 83% above its 5-day average. Puts are lagging at 19% below average.

The stock's fair-price zone runs from $40.69 to $41.36, encompassing nearly two-thirds of transactions surrounding the most-traded price, a range from $41.11 up to $41.18. On the way up the price started a trades spike from $40.76 to $40.81, but moved on upward from there.

Dollar Tree next publishes earnings on Feb. 27.

Decision for my account: I opened a position half an hour after the breakout, structuring it as a bull put spread, short the $40 puts expiring Dec. 21 and long the $37.50 puts, for a credit of $51 per contract.

That sets the break-even point at $39.49, a bit above a stop/loss set at double the average daily trading range.

If the rise continues, prompting to add to the position, I'll buy call options May call options with a delta of around 70.

(My trading calendar says I should buy long options expiring March, but DLTR has no March or April options, hence the unusually long lead time.) 


My trading rules can be read here.

And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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