DICKS Sporting Goods (DKS) has just reported earnings and we are seeing a potential mispriced situation brewing. We think the action is profit taking after running up back in November when we got behind the name as a strong value play.
Here is why we are seeing the name as a possible swing trade:
First sales just missed expectations.
Second, comparable sales, although down, we better than we had anticipated. Investors should once again consider the magnitude of the decline on the year, not just the decline itself. They were better than expected. Big positive.
Third, online sales showed strong growth.
Fourth, the margin situation showed a decline less than expensive.
Fifth, the outlook from the company is a bit conservative, but the story has not changed since November, at all, with the exception of the fact that the stock has run up 30% since we got behind it.
We believe this selloff will rebound over the next week or so. This is especially true once investors realize the situation has improved. The debt is gone. Cash remains strong. The dividend has been hiked. Valuation metrics, while having worsened slightly since the mid $20 trading history, remain attractive.
We think its a buy and are issuing a trade alert because the Street is has this one wrong, As of the time of this writing (9:40 AM) the stock appears it could retrace to well under $30. We think any purchase under $30 for a reversion is a great bet. While the Street could continue to overreact, we like the play. However, please adopt a strong (and relatively hard) stop loss strategy. It is ok to take a small loss, and get it back on the next one.
Buy the stock at $29.90 (or lower if you can!).
Our stop loss on this trade is for $28.75, or 3.84%.
We have a one week to two week horizon on this play, with a target profit taking level of $33.10, which is the midpoint yesterday before this report led to selling.
Again, this is a trade recommendation in general, and we advise you to do your due diligence and recognize the risks associated with trading. We will have a more in depth analysis of the situation later in the week.