Burlington Stores (BURL) has been on a roll. The stock has gapped up sharply after the last three quarterly earnings releases. If an investor bought BURL on the close the day before earnings and sold it on the close of earnings for each of those past three quarters, a holding period of just 72 hours, a trader would have realized more than 52% in short-term gains.
The stock has more than doubled since the day before its earnings release last November, outperforming the S & P total return by more than 76% and the consumer discretionary sector by more than 78%. The company reports Wednesday before the bell. Let's break down the company and a trade.
This is good news for those who have held the stock over this period, but it may concern investors considering jumping in now. Might they get caught "chasing" by jumping into the stock after doubling in the past nine months? BURL 1Y mountain Burlington, 1 year Burlington Stores is the third largest off-price retailer after TJX Companies (TJ Maxx) and Ross Stores. Selling recognizable brands draws slightly higher income and trade-down traffic.
Company same-store sales guidance is flat, up to 2% in 2024; however, bulls believe that may be conservative. Where many brick-and-mortar retailers have been consolidating, Burlington plans to add 100 new stores (net of closings) annually over the next four-to-five years. A quick Google search identified news stories regarding new Burlington stores in 6 locations in the past week alone.
Some analysts believe the increase in stores could advance total revenue by about 10% annually. At the same time, the company has expanded net income margins, a trend many analysts expect to continue. The trade At nearly 32 times forward estimated earnings, Burlington does trade at quite a premium to its off-price competition; TJX trades about 27 times forward earnings, and ROST trades at about 24 times earnings estimates, albeit with far more modest growth expectations of 7% and 10%, respectively, through January 2025, less than half the 27% consensus growth rate for Burlington over the same period.
Chasing a stock trading at 52-week highs ahead of a catalyst such as earnings can justifiably cause anxiety. Traders looking to profit from an upside move with less risk might consider a call spread as an alternative, such as the September $280/$310 call spread, which costs about $9, or about 3.3% of the current stock price.
Here's the trade example here : Buy Sep. 20 $280 call Sell Sep. 20 $310 call Because the stock needs to rally to break even, this trade does have a lower probability of profit than purchasing the shares outright.
However, one can observe the performance of a trade like this versus owning the shares over the past 20 reported quarters below. Due to the stock's historical earnings-related volatility, drawdowns, when they do occur, can be hard to recover from. You will notice that a 1-month call spread like the example here (illustrated in red) would have outperformed the stock (depicted in blue) because it lost less when the stock declined post-earnings than the stock did.
Getting the direction right would assure profits, but unfortunately, we don't have a crystal ball. The risk mitigation options strategies may provide can, in some cases, offer better returns over time. DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium.
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