Event: Department store chain Sears (NASDAQ: SHLD) reported earnings for its fourth quarter ending Jan. 31, 2013, on Wednesday after the market closed. The company reported an adjusted profit of $1.12 per share. Analysts expected a profit of 98 cents per share. Revenue came in at $12.26 billion, outpacing the expectation of $11.77 billion. Shares of Sears traded higher in the pre-market on Thursday, but the stock did not gain any momentum when regular trading commenced. The stock at mid-morning was down 5%.
Analysis: The market is taking the Sears results with a grain of salt. Sales, though beating estimates, were lower than the prior year. Analysts say Sears has been manipulating results with cost-cutting and asset selling versus showing sales growth from operations. The jury is still out on Sears, but this is no J.C. Penney (JCP). That department store is shedding 20% of its value on Thursday thanks to a massive loss. Management at J.C. Penney has completely blown the opportunity to build on a discount revival by abandoning once-popular sales. The new everyday pricing is a disaster. Sears on the other hand is an asset play. The company has much room to withstand changes in the industry and over time is likely to survive. In previous quarters we have seen selling in the stock replaced by some fervent buying. That is likely to be the case here. There is a trading opportunity with Sears over the next few months. Use the selling today to open a position that you can ride right up to the next earnings report. Consider Call options for more aggressive traders.
Action: Buy June $44 Calls to open a position in Sears for a 2-3 month trade.