With the COVID-19 crisis finally fading into the rearview mirror, the baseline narrative for EPR Properties (EPR) – a real estate investment trust (REIT) that focuses on entertainment-related businesses such as cineplex operators and amusement parks – appears quite compelling. Previously, under pandemic-related guidelines, non-essential activities were heavily constrained. Today, such mandates have been relaxed throughout the globe, opening the door for normal consumer activities.
Unfortunately, the market again faces a significant challenge, which might threaten the optimism for EPR stock and the broader consumer discretionary space. As Barchart contributor Rich Asplund noted, the major equity indices closed moderately lower on Thursday following a stronger-than-expected June ADP employment report. Generally, all nations seek robust labor market growth. However, in this case, the jobs print undermines the Federal Reserve’s efforts to contain stubbornly high inflation.
Near the end of last month, the equities sector enjoyed a significant pop as key data tracking consumer prices showed evidence of deceleration. Therefore, the Fed’s goal of “immaculate disinflation” – that is, slowing the rate of inflation without a rise in unemployment or the sparking of a recession – appeared in reach. Not surprisingly, then, EPR stock popped higher during the final sessions of June.
Basically, the underlying enterprise and its peers seemed poised to benefit from a rising labor market and slowing inflation. From a consumer’s standpoint, you had the perfect framework: more people with jobs while prices kept declining.
However, with the latest ADP jobs readout, too many people may be employed, which means the Fed will probably hike interest rates. Therefore, the hoped for immaculate disinflation might just be a pipedream.
Options Traders Wage Battle for EPR Stock
Given the disclosure of market-shifting news, EPR Properties represented a key highlight in Barchart’s screener for unusual stock options volume. Specifically, total volume reached 6,768 contracts against an open interest reading of 10,730. Further, the delta between the Thursday session volume and the trailing one-month average metric came out to 822.07%.
Drilling down, call volume mustered only 57 contracts while put volume spiked to 6,711 contracts. This pairing yielded a gaudy put/call volume ratio of 117.74, which on paper dramatically favors the bears. Presently, Barchart notes that the current put/call open interest ratio stands at 1.55.
Throughout late last year and much of this year, options flow data from Fintel showed that bearishly aligned transactions clouded the overall framework for EPR stock. Nevertheless, on the July 6 session, traders engaged in a multi-sweep transaction involving the selling of put options – a bullish tactic. Thus, not every trader is pessimistic about EPR Properties.
Also, it’s worth pointing out that Wall Street’s consensus rating for EPR stock is “moderate buy.” This assessment breaks down as five strong buys and four holds. Moreover, the high price target among analysts stands at $54, which gives roughly 15% upside from the time-of-writing price of $47.03.
Admittedly, a 15% move isn’t the most compelling upside target when we’ve seen much-hyped technology firms rip 2X or 3X returns. At the same time, it’s important not to forget that EPR stock features a forward yield of 7.02%. So, that’s got to be factored in when conducting a holistic review of the entertainment-oriented REIT.
Narrative Improving at the Right Time
On a fundamental note, the narrative for EPR stock may also be improving at the right time. Specifically, Barchart content partner The Motley Fool mentioned that a curtain of uncertainty over the REIT has been lifted, which initially started when one of the REIT’s largest tenants – theater operator Regal Cinemas – filed for bankruptcy.
However, EPR recently agreed to a new deal with Regal and the timing has been rather fortuitous. Not too long ago, the animated film “Spider-Man: Across the Spider-Verse” debuted to much fanfare and big box office receipts. The opener reinforced the prospect that Hollywood was back.
Naturally, with a hot employment print suggesting a significant rise in borrowing costs, the consumer economy might absorb serious body blows. As the Fed previously stated, it can’t let soaring prices get out of control. At the same time, wrestling down inflation through rate hikes may impose temporary (but painful) damage to the economy.
Even under that scenario, EPR stock could conceivably do well. Granted, it would be a higher-risk narrative. Nevertheless, the box office represents one of the cheapest forms of social entertainment that can’t be duplicated by streaming networks. Therefore, EPR is worth keeping on your radar, even if some traders are backing off.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
