It’s less than an hour before the markets open on Friday morning.
The Bureau of Economic Analysis released data this morning showing that the core personal consumption expenditures price index, excluding food and energy items, increased 0.2% in June. Year-over-year, it was up 2.6%, 0.1% higher than the estimate.
Stocks are set to move higher as it looks like June’s reading cements a September rate by the Federal Reserve. That’s good news on a Friday.
For my Friday commentary, I’m looking back on an article I wrote last August. It looked at three stocks exhibiting unusual options activity at the time. The common theme of the three stocks is that they all have single-letter stock symbols.
One of them is Ford (F), which has a lot of unusual options activity. While I’ll focus on its stock and UOA, I’ll also consider the other two’s situations.
Have an excellent weekend!
Ford Laid an Egg
Ford reported its Q2 2024 results on Wednesday after the markets closed, and investors did not like what they saw. Its shares dropped by 18.4% in trading on Thursday. As CNBC wrote. It was the automaker's worst day in the markets since 200
Ford isn’t the only one with an egg on their face. Earlier in July, I suggested in a Barchart.com article that “Ford is Back, Baby!” A tad premature? Maybe. There’s a lot to unwind here.
But first, let’s go back to Aug. 18, 2023.
“Another stock that’s fallen out of favor with investors is Ford (F). Its shares are down 26% over the past year. Investors might be skeptical about its electric vehicle plans,” I wrote.
I did say that Ford was losing a bundle on its EV business—$4.5 billion in 2023—but once the North American charging network got up to speed, EV production would head higher. I still feel that way.
The put I recommended to sell for income was the Sept. 8/2023 $12 strike. Trading around $12 at the time, but down 26% over the year, I didn’t think you could lose much on the trade.
If the shares didn’t get put to you, you generated an annualized return of 55.6% from the $38 premium.. If it did, I didn’t see you losing much more than $72 if that happened. As it turns out, the share price was $12.30 at expiration, so you kept your $38, but barely.
I’ve become enamored by selling puts for income and a better entry point. I’m not going to second guess that strategy. It does work.
Fast forward to today.
What’s the Problem?
It appears that it continues to have issues with its warranties. Payments made in the first six months of 2024 was $2.86 billion, 42% higher than a year ago. However, CFO John Lawler did say in the conference call that things should start improving on the warranty front.
“[T]here's the lag that you're going to have between the quality improving and the
warranty run rates improving. And so, the first step, as Jim [Farley] said, is the quality improving and we're seeing that in the physicals now. And that lags, you know, 12 to 18 months and we should start to see the warranty coming in,” Lawler stated.
Let’s assume that he’s correct. How does this play out?
Well, it didn’t change its guidance for 2024. It still believes it will generate $11 billion in adjusted EBIT this year at the midpoint of that guidance with adjusted free cash flow of $8 billion, $1 billion higher than its previous guidance.
So, even though its warranty costs were higher, it’s still making decent money -- its adjusted EBIT for the first half was $5.5 billion, although it was down from a year ago. As its quality gets better, these numbers should move higher. Remember, this includes a $2.46 billion adjusted EBIT loss in the first half from Ford Model e, the EV unit.
Ford trades at a very low 1.02x its tangible book value per share of $10.96. It’s been lower at times in recent years, but it’s also been higher. At the end of 2021, the multiple was 1.63x, according to S&P Global Market Intelligence.
Its business isn’t collapsing. Far from it.
Ford’s Unusual Options Activity Worth Considering
On Thursday, it had 17 unusually active options—Vol/OI over 1.24 and expiring in a week or more—four of them over 10.0, all expiring by sometime in August.
With the markets very volatile right now, I wouldn’t try to generate income from selling puts. You have a good chance of having to buy the shares at expiration. Instead, I’m looking at one of the other 13.
The Jan. 17/2025 $11 strike expires in 176 days or a little over six months. A lot can change between now and then. The down payment is high at 10.2%, but the dollars spent ($114) isn’t too taxing.
To consider exercising your right to buy 100 Ford shares, based on its closing price of $11.16, it must appreciate by 98 cents (8.8%) before the January expiration. It’s traded above $12.14 on approximately five occasions over the past year. It’s doable.
The delta of 0.56215 suggests that you can double your money by selling the call before expiration if its share price increases by $2.04 (18.3%). Given the big correction, that’s a bigger ask, but you can still get your down payment back by selling before expiration.
That makes the risk/reward reasonable.
The Other Two Stocks
As for the other two stocks from a year ago, Agilent Technologies (A) and U.S. Steel (X), the latter had an unusually active option yesterday, but the former did not. Agilent stock is up 16% since last August, while U.S. Steel is up 31%.
Nippon Steel (NPSCY) has hired former Secretary of State Mike Pompeo to help get its deal to buy U.S. steel for $55 a share ($14.1 billion) approved by U.S. regulators. Both political parties oppose the sale as does the United Steelworkers union. It’s no slam dunk.
While the Dec. 19/2025 $50 call has a moderate down payment of 7.9% ($3.95), the maximum you’re going to make on this bet is 27% [$55 - $50 - $3.95 = $1.05] but you’re not guaranteed that regulators will give it the thumbs up. Therefore, you’re taking unnecessary risk when there are so many more straightforward ways to make a 27% return.
As for Agilent, I said it was in value territory last August when it was trading under $120. It now trades around $137, or about 25.2x its trailing 12-month earnings. As I said, there were no unusually active options yesterday.
It just made a nearly $1 billion acquisition of Biovectra, a Canadian manufacturer of biologics, active pharmaceutical ingredients, and other molecules for targeted therapeutics. It paid a handsome price for the company -- 7x sales and 32.5x EBITDA -- which is more than the average of deals done since 2019 for companies similar to Biovectra.
I’m not nearly as interested as I was a year ago. I’d pass.
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.
