Lowe’s Companies: Buy LOW Call Options in Defiance of the Market

Lowe’s Companies, Inc. (NYSE:LOW) reported impressive fourth quarter results yesterday; yet, investors and traders were largely unimpressed with the performance. In fact, as at market close yesterday, the shares of Lowe’s were down 0.29% to close at $74.43 after the stock has had a pleasant rally to a new 52-week high of $75.98. More so, the pessimistic outlook on the stock was still holding as the stock declined another 0.04% in after-hours trading.

This piece seeks to explore two reasons options traders should buy LOW call options on the dip in order to make decent profits in the next couple of months. Lowe’s with its market capitalization of $73.13B is a home improvement retailer. The company sells home improvement products in various categories, including tools and hardware; kitchens and appliances; fashion fixtures, lumber and building materials; and outdoor power equipment among others.

Previous Coverage on Low Options

The first reason I am optimistic about the prospects of Lowe’s companies in the impressive performance of my previous options coverage on the stock. I have written about trading the options of Lowe’s about three times in the last nine months.

My last coverage of the stock was in December 2014 in a post in which I provided a one-month update on previous LOW options recommendations. At the conclusion of that December coverage, I recommended buying the LOW Apr 2015 62.500 call (LOW150417C00062500at an asking price of $5.30. When I wrote that December piece, shares of Lowe’s were trading around $65.57 per share.

Two months later, share of Lowe’s have soared to set another 52-week high of $75.98 (yesterday) to mark a 15.87% growth in 2 months. The options contract that I recommended at an asking price of $5.30 is already up an impressive 124.90% to close at $11.92 yesterday.

It needs no mentioning that the stock and options of Lowe’s have delivered an impressive performance in the last two months. I think you may want to sell the LOW Apr 2015 62.500 to a close so that you can enter new positions on the LOW options. However, if you still want to ride that bull, you should endeavor to manage your gains with stop losses along the way.

Impressive First Quarter Results

The second reason I am optimistic about the prospects of Lowe’s is the better than expected fourth quarter results that the company posted yesterday. Lowe’s reported net earnings of $450M to mark a 47% year-over-year improvement. Earnings came in at $0.46 per share to mark a 29% year-over-year improvement and to beat the consensus estimate of $0.43 per share. Lowe’s reported revenue of $12.5B to mark a 6% year-over-year improvement and to beat the consensus estimate.

Going forward, Lowe’s is optimistic about the current year based on its strong guidance for FY 2015. The company says it expects earnings of $3.29 per share on a revenue growth of 4.5% to 5%. Lowe’s optimistic guidance contrasts sharply against the pessimistic outlook that Home Depot delivered for 2015; hence, Lowe’s call options are a better alternative.

How to Trade LOW Options

The fact that the shares of Lowe’s are trading down after the impressive fourth quarter earnings results is one of the instances when investors choose to be inexplicably irrational. However, irrational acts by traders and investors often come with consequences and the veil of irrationality often clears away when losses are recorded.

Hence, I am sure that the tide will turn in the favor of Lowe’s and that the buying action will be started with renewed vigor. I recommend that you buy LOW call options (they didn’t disappoint in the last three times). I am especially interested in the LOW Jul 2015 72.500 call (LOW150717C00072500) at an asking price of $4.90.

— Daily Option Alerts

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