Dollar Tree stock (NASDAQ: DLTR)
“We remain long-term believers in DLTR’s story including the ongoing turnaround at Family Dollar, however, we are incrementally concerned around accelerating cost pressures from both freight and wages, particularly in light of the Dollar Tree banner’s fixed $1 price point which limits its ability to absorb higher costs through price increases, putting margins at risk,” the note said.
Throughout the summer, inflation readings have come in ahead of the 2% level that the Federal Reserve targets over the long term, while recent jobs reports have shown strong wage growth. That should be worrying news for a company whose margins were already under pressure when inflation was muted, Deutsche Bank said.
“While management points to DLTR’s 35-year history of operating at a $1 price point through multiple inflationary and deflationary periods, we highlight that Dollar Tree’s operating margins have been under pressure for a number of years,” the note said.
The stock has fallen 15% over the last three months, in part due to concerns about inflation. Shares are down more than 8% for the year.
Deutsche Bank slashed its price target on Dollar Tree to $102 per share from $129. The new target is just 3% above where shares closed on Friday.
Darden stock (NYSE: DRI)
“We believe the market largely appreciates the benefits of Darden coming out of the pandemic and cost pressures will dampen the fiscal year outlook towards the middle of the guidance range,” the note said.
One potential issue is that the company is still well below pre-pandemic staffing levels, which will make bringing in-person dining fully back an expensive proposition.
“Darden is still down over 20% labor hours at an Olive Garden (likely down 25%) with in-restaurant traffic down 20%+ . … And it leaves us wondering the degree of sequential margin compression ahead for Darden as on-premise labor comes back or the limitations to on-premise traffic recovery if labor hours remain significantly below pre-COVID levels,” the note said.
Evercore trimmed its price target for Darden to $155 per share from $165.
Shares of Darden are up more than 21% year to date.
Stocks that fell after earnings
Options are a popular way for investors to position themselves ahead of corporate earnings, but volatility can persist outside of quarterly events as well. Here’s a look at some of Wall Street’s options ideas and trends this week as the second-quarter earnings season comes to a close.
Amazon was one of these names, falling 7% after its second-quarter revenue fell short of expectations. Even after that move, Amazon’s implied volatility remains low, and the stock has upside potential, according to JPMorgan.
“Investors continue to favor Staple-Tech over Disruptive-Tech, and this momentum is likely to favor AMZN,” according to the note.
Following the report and subsequent slide, the market is pricing in more volatility for Paypal, which presents an opportunity for options traders to profit.
According to the JPMorgan note, “implied volatility remains rich, and until these tailwinds become more evident, we recommend monetizing this elevated volatility” by selling strangles on the stock.
JPMorgan advises selling a strangle in this situation because both options are out of the money. When a trader sells options, he or she receives premiums from buyers.
Selling a strangle does carry a higher level of risk than simply purchasing a put or a call. For example, if the stock falls below the strike price for the put option, the option seller will be forced to buy the stock at a price higher than the market.
A macro trade The Wall Street world saw a significant divergence this week when two top firms took opposing views on how stocks would end the year.
Citi downgraded US stocks to neutral, citing rising interest rates as a reason for the decline in tech stocks. However, Goldman raised its S&P 500 year-end target to 4,700, representing a 5% increase for the index.
Options on the SPDR S&P ETF Trust (SPY) or the index itself are worth considering for investors who agree with one prediction or another, or who want to hedge a major move in either direction.
Susquehanna’s Christopher Jacobs said in a note on Thursday that investors were buying a lot of calls on the ETF, implying that market participants agreed with Goldman’s forecast more.
“Perhaps the investor is simply looking to monetize a belief that the market is now underestimating the upside tail potential relative to the downside, with so much focus on areas of concern and relatively few actually making the case for further upside in the near term,” the Susquehanna note said.
Traders can buy and sell call and put options on widely traded ETFs in the same way they do stocks.
In this case, an investor looking to hedge downside risk might consider purchasing put options on the broad index. On the other hand, if an investor is bullish on the market but isn’t quite ready to buy more stocks, purchasing a call option to capture some upside may be a viable strategy.