What a difference a week makes.
Last Friday, investors were crying in their beer as the S&P 500 closed down 2.5% on the week. As I write this midday on Friday, the S&P 500 has regained all those losses and then some. It’s up nearly 6% for the week.
The reason for this week’s rally? Investors are betting that interest rates have peaked and they’ll start falling in late 2024. Others, such as “bond king” Jeffrey Gundlach, feel they’ll start coming down in the first half of 2024 as the economy worsens.
Whatever will happen will happen.
In the meantime, why not treat yourself to some unusually active options as an early Christmas gift to get you in a holiday mood?
Here are three I’d start with.
Have an excellent weekend!
Groupon
I find it hard to believe that I'm recommending you buy anything to do with Groupon (GRPN). It's a stock that's been in the wilderness for so long that I completely forgot that it was still public.
But here we are.
The daily deals discount site has two call options in Barchart.com’s top 20 unusually active options, and the Barchart Technical Opinion rating is flashing a Strong Buy rating. Need I say more?
That’s what I get for falling asleep at the wheel. Groupon’s delivering good news for its faithful shareholders in 2023, up nearly 60% year-to-date and 107% over the past year.
What in the blazes has gotten into this perennial loser?
Well, as best I can tell, GRPN stock got a very positive call in mid-October from investment bank Roth MKM. The firm’s Research analysts initiated coverage of the company's stock with a Buy rating and a price target of $30, more than double its current share price.
Roth believes that the lower consumer spending and belt-tightening underway will encourage shoppers to more regularly seek out discounts, providing Groupon with increased demand for its services.
At the same time, Groupon’s been doing a little of its own belt-tightening, leading to Q2 2023 adjusted EBITDA of $15.2 million, 167% higher than a year earlier, despite a 16% decline in income.
Most definitely, there is an opportunity for its shares to move higher on revenue improvement in the coming quarters.
So, of the two call options to buy -- they’re both Jan. 19/2024 expiries -- I’d go with the $16 strike. Its Vol/OI ratio is 11.54, considerably lower than its $17 strike at 30.56, but the shares only have to move up to $18.30 ($2.30 ask price) rather than $19 with the latter.
Molson Coors
This is another company I’m surprised to be recommending. I thought Molson Coors (TAP) was dead and buried. Apparently not. The fourth-largest brewer in the world reported its Q3 2023 results on Thursday, and they were pretty darn good.
Net sales rose 11.0%, excluding currency, to $3.3 billion, while its non-GAAP earnings jumped 45.5% to $1.92 a share.
As a result, it adjusted its guidance for the year. On the top line, it expects sales to grow by high single digits, while on the bottom, it sees its pre-tax underlying income for the year to rise by 34% over last year at the midpoint of its guidance, up from 24.5% in its previous guidance.
Between its light beer brands (Miller Lite, Coors Light) benefiting from the Bud Light controversy and several price increases without any hit to its demand, the business is generating much higher profits.
It expects free cash flow of $1.2 billion in 2023. As a result, the board approved a new $2 billion share repurchase program for its Class B shares over the next five years.
Based on its enterprise value of $18.2 billion, it has a free cash flow yield of 6.6%. Anything between 4% and 8% buys growth at a reasonable price.
As for the unusual options activity, the Jan. 17/2025 $65 put option has a volume of 1,102, 10.5x its open interest. The bid price of $7.90 is an annualized yield of 10.9%. With 441 days to expiration, if you sell the put, and its share price appreciates by 8.9%, you pocket the $790. On the downside, it’s currently in the money. You start losing money below $57.10.
While it doesn’t give you a whole lot of leeway, you do have more than a year for this to play out. If Molson Coors continues to deliver good top-and-bottom-line results, I don’t think you’ll have to worry too much about having the shares put to you in 2025.
Starbucks
This last one I’ll never have a problem recommending. Starbucks (SBUX) is one of those companies where the cream always seems to rise to the top no matter the issues it faces.
The company reported Q4 2023 results on Thursday. Its revenue was $9.38 billion, $90 million higher than the analyst estimate, while it earned $1.06 a share, nine cents higher than analyst expectations. Revenues are expected to grow by 11% at the midpoint of its guidance for 2024. Its earnings will increase by 17.5%.
Global same-store sales increased by 8% on a customer check that was 4% higher and a 3% increase in the number of transactions during the quarter. It expects its global same-store sales to increase by 6% in 2023.
CEO Laxman Narasimhan outlined its Triple-Shot Reinvention plan to keep Starbucks moving in the right direction in 2024 and beyond.
It pointed out in its presentation that average weekly sales at its U.S. company-operated stores over the past five fiscal years increased by 50%. Its mobile order pick-up and delivery orders accounted for 31% of its U.S. company-operated stores in 2023.
Food sales, often the forgotten item at Starbucks, were $6 billion in 2023 at its North American company-operated stores, with 50% of those sales from hot breakfast items.
There are so many items covered by its presentation of 101 pages that I’ll leave it to you to go through. You can read it here.
As I write, SBUX shares are up more than 3% on the day.
The option I’m looking at of the four with volume of at least 1.25x open interest is the Jan. 19/2024 $110 call. Its ask price is $1.22, a low 1.1% down payment on its $110 strike. The delta is 0.25241, which means you double your money if SBUX increases by $4.83 over the next 11 weeks, so the share price doesn’t even need to hit $111.22 for you to win on your Starbucks bet.
Worst case, its shares fall, and you lose out on $122, putting the risk/reward proposition solidly in your court.
On the date of publication, Will Ashworth 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.
