Editor’s Note: We are providing an equity trade for conservative investors and an options trade for aggressive traders.

EQUITY TRADE INSTRUCTIONS

Symbol: SIG (NYSE)
Limit: Buy below $36
Holding Period: 4 months
Target Price: $45
Target Gain: 25%

OPTIONS TRADE INSTRUCTIONS

Symbol: SIG 190418C00035000
Limit: Buy the Call option below $5
Strike Price: $35
Expiration Date: April 18, 2019
Target Gain: 100%

COMPANY DESCRIPTION

Signet Jewelers engages in the retail sale of diamond jewelry, watches, and other products in the United States, Canada, the United Kingdom, the Republic of Ireland, and the Channel Islands under several well-known brand names including Kay, Jared, and Zales. The company also operates a diamond polishing factory. Signet Jewelers Limited was founded in 1950 and is based in Hamilton, Bermuda. Link to company website.

TRADE RATIONALE

Signet Jewelers has gotten slammed over the past week after releasing quarterly results that exceeded the consensus analyst estimates for revenue and earnings. The culprit was some of the forward guidance in the press release that accompanied the numbers, including a 1.5% downward revision to same-store sales expected in the fourth quarter. However, the company increased its same-store sales guidance for 2019 and upped the bottom-end of its EPS estimate for next year.

Of course, Signet’s timing could not have been worse in terms of overall stock market sentiment. Investors are running scared as evidenced the 5% drop in the S&P 500 Index this month. Also not helping is competitor Tiffany’s (NYSE: TIF) 20% drop after its third-quarter results disappointed the market two weeks ago. Yes, SIG deserved to sell off a bit too, but not by 30%. All of which begs the question, what is a fair price for Signet based on what we now know?

The technical indicators aren’t much help in this case help since SIG has broken through its lower Bollinger Band and short-term support. Although my IDEAL Stock Rating System now assigns a perfect score of 10 to SIG, that may not matter much in the near-term, either. This market is trading on emotion, so fundamental arguments for valuation are falling on deaf ears at the moment.

However, the institutional shareholders that control 94% of SIG’s float are not the type of investors to panic. I believe some of them will view yesterday’s selloff as an opportunity to acquire more shares at a bargain price. For that reason alone, I believe SIG will gradually rise towards $45 over the next couple of months.

If that happens, then we should be able to close this position out early with a very nice ROI. The ride could be bumpy, which is why I am selecting an options expiration date in April in case it takes a bit longer for the market to settle down than I expect.