It’s Friday, which means it’s time to talk about unusual options activity from Thursday trading.
There were 1,086 unusually active put and call options in Thursday trading -- options expiring a week or later and a Vol/OI ratio of 1.24 or higher -- the highest Vol/OI ratio was Sunpower (SPWR) at 120.31. A total of 16 options were unusually active for the solar company.
While it’s tempting to speculate on the crippled business, I’ve found a different target to focus my attention. Five Below (FIVE), the tween and teen focused value retailer, has gotten killed in 2024.
Its stock is down 66% year-t0-date with the potential for more losses in the weeks ahead. Despite its stock being a prime example of a falling knife that traditional investment practitioners say you should avoid like the plague, I see this as the perfect play for aggressive, risk tolerant investors.
Here’s why I feel this way.
Have an excellent weekend.
5 Unusually Active Put Options Worth Considering
Five Below’s five unusually active put options in Thursday trading had Vol/OI ratios between 1.92 on the low end and 43.10 on the high end.
My first instinct is to focus on the put with the highest Vol/OI ratio. The Aug. 16 $60 put is currently out of the money by 26% based on the $75.75 closing price. Sell one of these puts and your annualized return is 8.6%.
Now, if this were Berkshire Hathaway (BRK.B), and the put expired in 28 days, it would be a no-brainer for an investor looking for income. Alas, that’s not the case.
Five Below stock, as I said, has lost 66% over the past seven months. Even over the past week, it’s down a whopping 26% compared to a 2% loss for the S&P 500. A 26% drop over the next month is not out of the question -- it’s down 34% over the past month -- so this can’t be described as anything other than a falling knife.
I’ll get back to the options at hand in a little bit but before I do that, I want to ponder why it’s lost so much of its value in 2024.
How Did Five Below Get Here?
Although I’ve followed Five Below for many years, it’s been a long time since I’ve actually written about the business or an investment in its stock. I couldn’t resist given the options activity.
This week’s drop happened for two reasons.
First, its same-store sales fell by 5% in the 10-week period ended July 13, compared to a year ago. Through the Aug. 3 quarter end, it expects the same-store sales to decline between 6% and 7%. Secondly, CEO Joel Anderson resigned his position effective immediately.
On the first point, its same-store sales have weakened in recent years. In fiscal 2021 (January year end), they jumped 30.3%. In fiscal 2022, they dropped by 2.0%, and increased by 2.8% in 2023. When I really paid attention to Five Below, its annual same-store sales growth were always double-digit increases, so clearly something has plagued the company in recent times.
As for Anderson, he served as CEO for over nine years, an above-average tenure for a CEO of a decent-sized company. With a strong retail background, it’s hard to pinpoint the biggest factor in its current situation. Anderson felt it was time to pursue other opportunities.
I do know that investors aren’t happy. Google the words “Five Below class action” and you get a whole bunch of results. Lawyers are trying to determine if the company violated securities laws by failing to provide timely disclosure of information detrimental to the business’s revenues and profits.
Class action lawsuits around stocks are as common as NFL fans in this country. It doesn’t, by itself indicate anything other than the business model isn’t working like it once did.
What is certain is that its growth plans will likely slow.
“During the upcoming second-quarter print, we expect management will reduce its new store outlook for 2025, currently between 250 and 270 new locations, or 15% unit growth, to something closer to 200 new locations, or 11% unit growth, and scale back its plans to reach 3,500 stores by the end of 2030,” RetailDive reported William Blair analyst Phillip Blee’s comments regarding the situation.
In the end, Anderson may have realized that the fixes needed to reignite growth would take too long at a time in his career when he might only have one more big assignment available to him, so he decided to bail, but that’s only speculation on my part.
Why Consider Selling FIVE Puts?
The retailer’s enterprise value is currently 1.91x its trailing 12-month sales. That is the lowest multiple in the past decade, while its operating margin is 8.1% according to S&P Global Market Intelligence, its lowest since fiscal 2020, but still reasonably healthy.
Virtually every metric screams undervalued.
If you are an aggressive investor and believe that its lower-income customers have caused a sales slowdown by tightening the purse strings, not because of some sort of operational meltdown, you ought to consider selling FIVE puts.
The last time FIVE stock traded below $60 is March 2020 during the market’s big correction. Before that it was November 2017. That’s twice in nearly seven years.
That tells me the probability of it falling to $60 in the next 28 days is remote. Not impossible, mind you, but remote.
The point I’m making is that buying Five Below stock between $50 and $60 is an unbelievably attractive entry point for a long-term investor
So, I’m suggesting you generate income from selling puts until you gain entry between $50 and $60, whether buying its stock on the open market down the road, or having the shares put to you while selling these options for potential near-term income.
This is for aggressive investors only. If you sell the Aug $60 put and the shares drop to $50 over the next four weeks, you’ll be out $10 a share or more. Your losses are unlimited
Govern yourself accordingly.
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.
