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Trade Idea: Bullish Seasonality Play on Dollar General Before Holidays

11/08/2018 1:56 pm EST

Focus: STOCKS

Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

Discount retailer Dollar General (DG) has been a standout performer in 2018, with the shares up more than 25% year-to-date as of this writing. The stock wasn’t immune to October’s bruising bout of equity volatility, writes Elizabeth Harrow Thursday.

But DG’s lows last month were contained by its rising 80-day moving average and the $102 level -- coincident with a round 10% year-to-date return.

Now, with the holiday shopping season nearly upon us, seasonality suggests there may still be more upside left for DG in the months ahead.

Specifically, data from Schaeffer’s Senior Quantitative Analyst Rocky White shows that DG has been positive 88% of the time during the November-December period since it began trading in late 2009. The stock’s average return during this closely watched holiday shopping period is 6.09%, with a median return of 6.63%. Given that DG is already trading at new highs, a repeat performance during the 2018 holiday season would push the retail stock even deeper into uncharted territory.

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What’s even more impressive is that DG has remained resilient amid an increased surge of interest from short sellers. Short interest on the retail chain rose by 37.6% over the past two reporting periods, but this selling activity failed to push the stock below solid support levels -- pointing to deep-seated technical strength. With DG now rallying to record highs, a capitulation by these bears could fuel additional upside in the weeks ahead.

Likewise, options traders are skeptical of DG. Schaeffer’s put/call open interest ratio (SOIR) stands at 1.11, as puts outnumber calls among options set to expire within three months. This ratio ranks in the 86th percentile of its annual range, as short-term traders have been more put-heavy on DG only 14% of the time during the past year. Plus, the stock is already trading above heavy call open interest at the November 110 and 115 strikes, suggesting that options-related resistance is unlikely to slow DG’s momentum anytime soon.

There’s room for analyst upgrades to give the stock a bullish boost, too. While 17 brokerage firms call DG a Buy or better, there are still 11 Hold or Sell ratings on this outperforming equity. A round of overdue upgrades or price-target hikes could draw new buyers to the table.

Traders looking to preserve capital in the volatile market environment may want to consider buying call options on DG.

Weekly options expiring on Nov. 30 are affordably priced, from a volatility perspective, with at-the-money implied volatility arriving at 25.65% as of this writing -- just barely north of the 24.23% IV priced into the front-month options expiring next Friday.

This series will provide exposure to potentially upbeat Black Friday sales figures, while insulating from any sell on the news event risk related to the early December DG earnings report.

View Schaeffer’s Investment Research for stock and options ideas, options education, and market commentary here

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