A weak earnings report from FedEx (FDX) didn’t do much to disturb the stock market uptrend after indexes rallied powerfully Thursday. Now the earnings calendar turns its attention to Costco (COST), Jefferies (JEF), Micron Technology (MU) and KB Home (KBH). The only laggard among those is Micron after a tumble of nearly 47%, while Costco, Jefferies and KB Home sit near new highs.
Costco stock has started to lag the S&P 500 slightly as the stock holds near an 896.67 buy point. Results are due Thursday after the close.
Jefferies, meanwhile, just bounced off its 10-week moving average for the second time since a June 27 breakout to new highs. The continued strength comes after Jefferies recently passed the 20% profit target from a 47.87 entry. Results from the investment bank are due Wednesday after the close.
Micron also reports late Wednesday. The memory-chip leader started its sell-off just before its last earnings report in late June. The results were fine, but the company gave lukewarm guidance for the August-ended quarter.
Citi analyst Christopher Danely said on Friday that there’s a lot of pessimism around the upcoming report and the potential for weak guidance again. He said the general bear thesis points toward the possibility of lower DRAM pricing for the next few quarters, hurt by slack demand in the PC and handset markets.
Focus On Costco Stock
Costco has been a longtime leader in the retail sector thanks to a consistent track record of earnings and revenue growth.
When the company reported earnings in May, Costco stock shaved a 3.3% intraday loss to less than 1%. Quarterly profit increased 10% to $3.78 a share, with revenue up 9% to $58.5 billion. Digital sales increased 20%, but only made up about 10% of Costco’s total sales in the quarter.
Earlier in the year, Gary Millerchip took over as chief financial officer. He came from Kroger (KR), which has been investing heavily in its e-commerce business.
Boosting digital sales will be a primary focus for Millerchip. Costco’s acquisition of logistics firm Innovel Solutions in 2020 helped the retailer expand its capability to deliver larger items like furniture, televisions and appliances.
For the August-ended quarter, look for quarterly profit to be up 4% to $5.08 a share, with revenue up 1% to $79.9 billion.
Watching KB Home
Homebuilders continue to lead the market after the Federal Reserve gave the stock market what it wanted Wednesday with a 50-basis-point rate cut. Homebuilders have plenty of tailwinds, including a 30-year fixed mortgage rate that’s declined to around 6.1%. Eight months ago it was up around 8%.
But Lennar (LEN) came under pressure Friday despite better-than-expected earnings and revenue. Adjusted profit came in at $3.90 a share, flat from a year ago as gross margin weakened to 22.5%. The company also cited margin pressure for the November-ended quarter. Revenue increased 8% to $9.4 billion.
Lennar cleared a double-bottom base July 18 and went on a nice run after that. But the stock gapped below its short-term moving averages Friday and could be poised for a test of its 50-day line.
Group peer KB Home reports Tuesday after the close. The FactSet consensus is for adjusted profit of $2.15 a share, up 14% year over year, with revenue up 9% to $1.73 billion.
KB Home slipped below the 88.31 buy point Friday after a low-volume breakout.
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 option trading strategy works, and what a call-option trade recently looked like for Costco stock.
Time The Market With IBD’s ETF Market Strategy
First, identify top-rated stocks with a bullish chart. Some might be setting up in sound early-stage bases. Further, others already might have broken out and are getting support at their 10-week moving averages 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.
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.
Once you’ve identified a bullish setup in the earnings calendar, check strike prices with your online trading platform, or at Cboe.com. Also, 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 — that’s 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.
Costco Stock Option Trade
When Costco traded around 903.50, a slightly out-of-the-money weekly call option with a 905 strike price and a Sept. 27 expiration came with a premium of around $19.50 per contract. That was 2.2% of the underlying stock price at the time, a fairly cheap trade and well below 4% threshold of our strategy.
One contract gave the holder the right to buy 100 shares of Costco at 905 per share. The most that could be lost was $1,950 — the amount paid for the 100-share contract. To break even, Costco would need to rise to 924.50, factoring in the premium paid.
The expected move in the options market for Costco, based on the at-the-money strike price of 902.50, was about 40-41 points up or down. This was determined by adding the at-the-money call premium and the put premium for the Sept. 27 contract.
Follow Ken Shreve on X/Twitter @IBD_KShreve for more stock market analysis and insight.
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