Trade Alert: Earnings, 9/5/2023

Fading retail.

Lessons From Last Week

Prior to last week, we were looking at six metrics when selecting our earnings trades:

• LikeFolio’s earnings score based on social data. The higher the number, the more bullish, the lower (more negative) the number, the more bearish.

• Portfolio Armor’s gauge of options market sentiment.

• Chartmill’s Setup rating. On a scale of 1-10, this is a measure of technical consolidation. For bullish trades, we want a high setup rating; for bearish trades, a lower one.

• Zacks Earnings ESP (Expected Surprise Prediction). This is a ratio of the most accurate analyst’s earnings estimate versus the consensus estimate.

• The Piotroski F-Score. A measure of financial strength on a scale from 0-9, with 9 being best.

• Recent insider transactions.

Last week, we added RSI (Relative Strength Index), looking for RSI levels below 70 for bullish bets, and above 30 for bearish bets.

Our other lesson from last week was to have a bearish bias toward retail. A number of retailers, particularly lower-end ones, have reported earnings that were worse than expected.

Today’s Retail Stock

Here’s how today’s retailer stacks up on our seven metrics:

1. Social data: -21

2. PA Options sentiment: very bearish

3. Setup rating: 3

4. Zacks ESP: N/A

5. F-Score: 3

6. Recent insider transaction(s): open market sales in December.

7. RSI: 32

Details below.

Today’s Bearish Trade

The company is Kirklands (KIRK 0.00%↑) and the trade is buying the $3 strike puts expiring on September 15th for $0.65. The max loss on 5 contracts is $300, and the break even is with KIRK at $2.35. I know we’ve talked about using longer dated options in most cases, but in this case, the January-dated options looked too expensive. I might consider them for a post-earnings trade though, if this trade goes against us (short interest here is about 19%).

Exiting This Trade

I’m going to see what happens after this company reports.