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business newsFamily Dollar Gets Marked Down?
This may be a good entry point for a bearish position.
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I'm establishing a bearish calendar spread in Family Dollar (FDO). The specific position taken is:
- Bought to open 10 July $27.50 puts (FDOSY) at $2.20 a contract
- Sold to open 10 April $27.50 puts (FDOPY) at $0.75 a contract
FDO has benefited from heightened interest from investors, who have seized on it as one of the few names that's offered an earnings growth story during these tough economic times. This investment theme has probably been responsible for the fact that the level percentage of shares owned by institutional money-management firms has increased from 82% to 99% during the past year.
I think both these trends have run their course, making the stock vulnerable to a decline. The rate of consumers looking to “trade down” is unlikely to increase and will possible reverse as the economy stabilizes. Family Dollar’s product mix also tends to be fairly inconsistent, making it hard to compete with other big-box retailers as a first-stop shopping choice for basic staples like food and clothing.
The company already has over 6,000 locations, making further expansion limited in nature. Any slowdown in earnings will likely lead to a rotation out of its shares and into better growth stocks that are more leveraged to a recovery in consumer spending.
With the stock moving back to the top end of its trend line near $31 a share, this looks like a good entry point for a bearish position. The company is slated to report earnings on April 8, keeping relatively high premiums in the April options and making the calendar spread a good strategy for gaining downside exposure.
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