Auto parts retailer Advance Auto Parts ( AAP ) is on deck to report its second-quarter results on August 15. The company will release its quarterly results before the market open, and the consensus calls for earnings of $1.65 per share on revenue of $2.26 billion. During the same period last year the company had a profit of $1.90 on sales of $2.26 billion, and the stock has dropped 5.8% on the year.
AAP was recently trading at $105.77, down $72.06 from its 12-month high and $6.64 above its 12-month low. Technical indicators for AAP are bearish and the stock is in a strong downward trend. The stock has recent support above $99.50 and recent resistance below $115.50. Of the 18 analysts who cover the stock, eight rate it a “strong buy”, one rates it a “buy”, six rate it a “hold”, one rates it a “sell”, and two rate it a “strong sell”. The stock receives S&P Capital IQ’s 3 STARS “Hold” ranking.
Advance Auto Parts has disappointed the market the last two quarters, with wide earnings misses and weaker than expected sales. Earnings have fallen sharply in the last four quarters, and that is expected to be the case once again with Q2 profit forecast to fall from $1.90 to $1.65 year over year. The auto parts sector is the most recent sector that faces pressure from online giant Amazon ( AMZN ) after the e-commerce leader announced plans to bully its way into the $125 billion U.S. auto parts market. Amazon announced its intentions in January, and AAP stock was punished in response. There is a lot of negativity in the stock at this time, but the bright side of the increased negativity is that the stock could make a strong rally on any signs of strength in the quarterly report. The street has a whisper number of $1.67 versus the consensus $1.65, so analysts expect a small beat, which could be exactly the catalyst the stock needs to move higher and erase some of its losses from earlier in the year.
Stock Only Trade
If you’re looking to establish a long stock position in AAP, consider buying the stock under $105.75. Sell if it falls below $95.25 or take profits if it gets to $121.50.
If you want a bullish hedged trade on the stock, consider a September 85/90 bull-put credit spread for a 30-cent credit. That’s a potential 6.4% return (66.6% annualized*) and the stock would have to fall 14.6% to cause a problem.
If you want to take a bearish stance on the stock at this time, consider a September 120/125 bear-call credit spread for a $0.40 credit. That’s a potential 8.7% return (90.7% annualized*) and the stock would have to rise 13.8% to cause a problem.
Covered Call Trade
To purchase the stock with a lower cost basis, consider a December $100.00 covered call. Buy AAP shares (typically 100 shares, scale as appropriate), while selling the December $100.00 call for a debit of $93.20 per share. The trade has a target assigned return of 7.2%, and a target annualized return of 21.1% (for comparison purposes only).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Originally published on InvestorsObserver.com