Big-box retailer Conn’s Inc. (NASDAQ:CONN) has been on fire in 2015, with the stock gaining more 67% so far this year.
The shares are red hot in today’s trading, gaining nearly 10% after Piper Jaffray upgraded CONN stock to “overweight” from “neutral.” As a result, CONN may be getting an additional bump from short-covering activity in today’s trading, with 35% of the stock’s float sold short.
All this activity, and we haven’t even touched Tuesday’s fourth-quarter earnings report!
Diving into the numbers, Conn’s is expected to post a profit of 63 cents per share, down from earnings of 74 cents per share in the year-ago period. However, revenue is expected to rise 16.6% to $431 million. That said, EarningsWhisper.com places the whisper number 2 cents higher, at 65 cents per share, hinting at elevated expectation among some in the brokerage community.
Speaking of analysts, Thomson/First Call reports that the brokerage bunch has largely ignored CONN stock. In fact, only seven analysts currently follow CONN, handing out three “buys” and four “holds,” with nary a “sell” rating to be found. Additionally, the 12-month price target of $33 appears on the light side, representing a premium of only about 10% to CONN’s current perch near $30.
As I noted above, short sellers are far from ignoring CONN stock. As of the most recent reporting period, some 13 million shares of CONN stock were sold short, which, at the shares’ current average daily trading volume, would take nearly 13 days to fully cover. As a result, there is considerable potential for a short-squeeze in the event of a strong quarterly earnings report or additional analyst upgrades, such as the one Piper Jaffray issued this morning.
Judging by activity in the options pits, short sellers have been lax in purchasing “insurance” for their short positions. CONN’s April/May put/call open interest ratio currently rests at 0.99, with puts and calls in near parity with one another. With heavy short interest, and an earnings report just over the horizon, I would expect to see considerably more call open interest — if not from bullish options traders, at least from short sellers looking to protect against a potentially sharp rally in the underlying stock.
Click to Enlarge And a potentially sharp move is exactly what April options activity is projecting for CONN stock. Specifically, April implieds are pricing in a potential post-earnings move of more than 17% for CONN. This places the upper bound at $35.15, while the lower bound lies at $24.85.
An upside move would place CONN just north of long-term resistance at $35, potentially sparking a serious follow-through rally due to short-covering. Meanwhile, a plunge to $24-$25 would leave CONN just north of solid support at the $24 level, which provided a backstop throughout February.
2 Trades for CONN Stock
Call Spread: Given CONN stock’s reaction to a simple upgrade from Piper Jaffray, I’m inclined to side with the bulls heading into a potentially better-than-expected quarterly earnings report. As such, traders looking to bet bullishly on CONN might want to consider an Apr $30/$35 bull call spread.
At last check, this spread was offered at 90 cents, or $90 per pair of contracts. Breakeven lies at $30.90, while a maximum profit of $4.10 is possible if CONN stock closes at or above $35 when April options expire.
Put Sell: On the other hand, if you are concerned that implieds are a bit overinflated (i.e. options are too expensive at the moment), a way to take advantage of the potential implosion of implieds in the wake of CONN’s report is to sell out-of-the-money puts. As such, an Apr $20 put sell may be a way to capitalize on support in the stock’s technical backdrop.
At last check, the Apr $20 put was bid at 85 cents, or $85 per contract. As with all put sell positions, you will keep the initial premium of $85 per contract if CONN closes at or above $20 when April options expire. However, if CONN trades below $20 prior to expiration, you may be assigned 100 shares of CONN stock for each put sold at a cost of $20 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
