Option Trade 
Dollar Tree, Inc. (NASDAQ:DLTR) Calls 
Tuesday, 23rd August, 2016

** OPTION TRADE: Buy the DLTR NOV 18 2016 100.000 call at approximately $2.70. Place a pre-determined sell at $5.50.

Note: No protective stop losses added -- but if you wish to do so make it $1.10.

by Ian Harvey

August 23, 2016

Dollar Tree, Inc. (NASDAQ: DLTR), an operator of discount variety stores offering merchandise at the fixed price of $ 1.00, is expected to beat expectations when it reports second-quarter fiscal 2016 results on Aug 25. Last quarter, the company delivered a positive earnings surprise of 11.3%.

Discount retailers have been successful at owning a segment of the retail sector that has continued to show strong growth. From a year-to-date perspective, Dollar Tree shares have gained almost 24% against the S&P 500’s gains of about 8%. Against its peers, Dollar Tree has grown almost four times the Retail sector’s performance.

Dollar Tree has been doing well on the back of its long-term strategies and growth initiatives, including store expansion and productivity gains, tapping of new markets and incorporating innovative sales channels to serve its patrons better. Also, the company's strategy of increasing consumables mix, rolling out freezers/coolers at stores, along with multi-price point expansion bode well for top-line growth. The company is progressing well with the integration of the Family Dollar buyout. While this integration is expected to generate synergies in the long run, the related costs and cannibalization will continue affecting results throughout the integration and re-banner process.

Nonetheless, the company's strategic investments in technological advancements and acquisitions bode well. All this, along with the company's optimistic guidance for fiscal 2016 make us confident about the upcoming results.

Dollar Tree Inc. has a market capitalization of $22.56 billion and a P/E ratio of 49.88. The firm’s 50 day moving average is $95.72 and its 200 day moving average is $85.82. Dollar Tree Inc. has a 1-year low of $60.31 and a 1-year high of $99.93.

Why Dollar Tree?

DLTR heads into its quarterly earnings release this week following a familiar pattern. Over the last few years, there has been a tendency to see Dollar Tree shares move lower into their earnings period, reflecting some anxiety from traders.

This quarter, shares of the stock have pulled back from the $100 level ahead of this week’s earnings announcement. The pullback comes immediately after shares hit an oversold reading on August 10 and conveniently frees up some overhead clearance for the stock to move higher after earnings.

The pullback puts DLTR shares in a position to bounce from their 50-day moving average and break back above the shorter-term 20-day moving average, a move that on increased volume would attract technical buyers.

In addition, due to the lack of volatility in the shares of late, the Bollinger Bands have contracted. This means that a slight move higher (above $97.65) would press an increase in upside volatility.

Analyst Input

Best Buy Co. was upgraded by equities researchers at Vetr from a “sell” rating to a “hold” rating in a research note issued to investors last Tuesday. The brokerage presently has a $34.32 price target on the technology retailer’s stock. Vetr‘s target price points to a potential upside of 5.31% from the stock’s current price.

Also, several other equities research analysts have recently commented on the company.

• Goldman Sachs Group Inc. reiterated a “buy” rating on shares of Dollar Tree in a research report on Wednesday, July 6th.

• Deutsche Bank AG upgraded Dollar Tree from a “hold” rating to a “buy” rating and lifted their target price for the company from $82.00 to $110.00 in a research report on Monday, August 1st.

• Vetr upgraded Dollar Tree from a “hold” rating to a “strong-buy” rating and set a $112.00 target price on the stock in a research report on Wednesday, July 6th.

• Buckingham Research reiterated a “buy” rating and set a $106.00 target price on shares of Dollar Tree in a research report on Wednesday, July 6th.

• Finally, Telsey Advisory Group decreased their price target on Dollar Tree from $102.00 to $95.00 and set an “outperform” rating on the stock in a report on Friday, May 27th.

Shares of Dollar Tree Inc. have been assigned an average rating of “Buy” from the twenty-five research firms that are currently covering the firm. One equities research analyst has rated the stock with a sell recommendation, six have given a hold recommendation, seventeen have assigned a buy recommendation and one has given a strong buy recommendation to the company. The average 12 month price target among analysts that have issued a report on the stock in the last year is $94.06.

Harvey’s Options Volatility Indicator

Conclusion

It is always preferable when a stock has lowered expectations ahead of earnings. Currently, short interest and Wall Street analysts’ recommendations reflect a lot of pessimism towards Dollar Tree. Only 43% of analysts currently have the shares ranked a buy, and more than seven times the average daily volume is tied-up in bearish short positions that are likely to result in a short covering rally on even a slight earnings beat.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the DLTR NOV 18 2016 100.000 call at approximately $2.70. Place a pre-determined sell at $5.50.

Note: No protective stop losses added -- but if you wish to do so make it $1.10.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.



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