Quick-Hit Earnings Trades #9

May 19, 2009

Today’s Quick-Hit Trade: Dollar Tree (DLTR)

Though many retailers have fallen on hard times as consumer spending has dried up, discounters like Dollar Tree (DLTR) are finding themselves at the right place at the right time. In fact, Dollar Tree is now a Fortune 500 company and was one of only 24 companies on that list to post gains for investors in 2008. DLTR seems to have caught the fancy of penny pinchers around the nation, but that’s not all that’s boosting its bottom line—the company continues to innovate and refine its business model. This discount chain recently launched an online portal that allows customers to order household and office items in bulk. They even offer free store delivery—look out BJ’s and Costco.

Dollar Tree stores are everywhere, but who would have thought the company would be on track to take market share from the major box stores? Just look at the numbers, and you’ll see that Dollar Tree is growing strong even during this challenging market. The company has posted an average earnings surprise of more than 6% across the last four quarters, and analysts have been steadily revising Q1 estimates higher—they’re currently 11% higher than they were just 30 days ago—a strong sign of another earnings surprise this time around! I am confident that this stock is a great near-term buy as frugal consumers look for the best deals and continue flocking to Dollar Tree. Look for Dollar Tree’s earnings on Wednesday, May 27. I’ll have a full update then and will be in touch if there are any major developments before then.

Earnings Scorecard

Our Earnings Scorecard shows that we have kept well ahead of the market this earnings season. While I’m only making specific buy and sell recommendations on a handful of the best earnings plays, don’t overlook my take on the many other companies that are putting their numbers out. Let’s see how the latest round of calls played out:

Friday, May 15

Abercrombie & Fitch Co. (ANF) – We made the call to avoid ANF, and it was the right one. ANF reported a loss for the quarter that was bigger than analysts expected. Management pointed to customers’ price sensitivity, and I expect this will continue to be an issue for ANF a bit longer.

JCPenney (JCP) – I called JCP’s quarter a mixed bag and told you that there was too much uncertainty to put any money into the stock. The retailer reported a 79% drop in first-quarter profit and lowered forecasts for the next quarter and full year. The stock is up slightly since the announcement, but the company is still on shaky ground, and I would avoid it.

Teekay Tankers (TNK) – The company reported a loss for the quarter because of an unrealized loss related to an interest rate swap. While I wasn’t expecting a loss for the quarter, I was expecting profits from this stock, and investors have responded well to the news and the stock is up nearly 6% since the announcement. Count TNK in the “bulls-eye” column.

Monday, May 18

Lowe's Companies (LOW) – First-quarter profits fell about 20% despite this being the historically strong quarter for the company. The stock is up since the announcement, but going into the weaker seasons, I wouldn’t expect big profits anytime soon.

Tuesday, May 19

Hewlett-Packard (HPQ) – The company said that its quarterly profit dropped 17% as sales slumped. These results were in line with the Street's expectations, and on par with mine. We'll have to wait and see what the stock does tomorrow, but HPQ's unimpressive report has barely budged the stock in after-hours trading.

Home Depot (HD) – I guess Home Depot is the #1 home improvement retailer for a reason. HD profit jumped 44% in the first quarter and beat estimates by 2 cents. I told you that if I had to bet on either Home Depot or Lowe’s that my money would be on Lowe’s. While HD may have had the better quarter, LOW is up about 1% and HD is down just over 5% on the news. I’m going to say I was right on this one.

That makes us a perfect 6-for-6 on last week’s calls, making our total record this earnings season an impressive 54 for 66.

Next Up

As you know, earnings season has come to an end. We’re waiting for a few more companies to report, including today’s new Quick-Hit Trade Dollar Tree. I’ll keep you closely updated on all of our trades and will let you know when we’ve reached the optimal exit point for each position.

That’s all for today. I’ll be in touch again on Thursday.

Until then,

Louis Navellier