Kroger Co has been a strong performer in 2014, rising almost 31 percent year-to-date, but Goldman Sachs thinks investors are underestimating the grocery-store chain and recommends buying calls in the company ahead of its results.
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Goldman analyst Stephen Grambling expects the company to raise its full-year profit outlook when it reports results on Sept. 11. His forecast for Kroger's earnings in the current quarter are also ahead of consensus expectations.
Over the past eight quarters, Kroger shares moved an average of 4.2 percent in the seven sessions following the release of its earnings, according to Thomson Reuters data.
"This quarter," Goldman wrote, "options are implying a +/-3.8 percent move, despite our analyst’s view that Kroger results could surprise by 7 percent."
The broker recommended calls for investors who "would like to lock in these strong gains [over the past 12 months] but still participate if there is further upside potential."
Kroger's September $52.50 calls suggest "that calls underprice the potential for shares to trade higher on results."
Shares of Kroger closed Tuesday at $51.74.