We love the deep-discount retail sector, especially these days. �We have a position in Dollar Tree (NASDAQ:DLTR) in our Winning Edge service that�s performing very well.� We all know the reason why:� The current economic malaise, consumer uncertainty, poor job market, etc., are conspiring to push buyers down the retail chain into the laps of the Family Dollars (NYSE:FDO) and Dollar Trees and Dollar Generals (NYSE:DG) of the world.
Family Dollar reports earnings before the open on Wednesday, with analysts expecting a relatively modest 63 cents a share.� We say modest because represents growth of just 12.5% from a year ago compared to the average gain of 22% seen in the past four quarters.�
The problem for FDO lately is that its record of beating the analysts� estimate has been spotty.� Two of the past three quarters have been misses, although you have to go back another 14 quarters to find the next miss.� Performance after recent reports has been iffy as well — two up and two down in the past four quarters, including a major 9% one-day plunge in January.�
The chart shows FDO at a key level.� The shares are up more than 20% off the August low.� But they are now approaching the $55 level, an area that has defined tops several times this year.
Despite this potential resistance, we like FDO ahead of earnings.� Expectations are modest, suggesting that FDO should exceed the analyst number.� Just four of 20 consider the stock a buy, which is hard to understand given that the stock is up nearly 10% for the year.� And the put/call ratio is putting in a relative peak at a level that has coincided with recent bottoms in the shares.�
Given the modest sentiment surrounding the shares, Wednesday�s report should give the stock the strength it needs to overcome resistance in the $55 region.� Up next is the all-time high just below $57 reached in May.� Buy the Oct. 52.50 call for around four bucks to leverage the expected move.
Have a great trading week.
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