As I write this, it’s approaching noon Friday on the east coast. The major indexes are either down or flat on the day. Stocks appear headed for their worst week since March.
Investors are worried about many subjects, including further interest rate hikes, higher bond yields, and a faltering Chinese economy.
While I can’t promise you a rose garden regarding these subjects, I can tell you that it can always be worse. Think March 2009 or March 2020.
My task on Fridays is to discuss unusual options activities that I find particularly interesting. The three options that have caught my attention today have one thing in common.
By the end, you ought to know what it is.
Happy Weekend!
Agilent Technologies
The first to catch my attention involves selling Agilent Technologies (A) put options. As I write this, one put and one call exhibits unusual options activity. While the call gives you a low ask price, I'm going with the Nov. 17 $115 put.
The bid price on this Agilent put is $3.70. Based on a share price of $119.63, we’re looking at an annualized yield of 12.4%. With 91 days to expiry, the volume is 828, or 2.55x open interest.
Currently, $4.63 above the strike, there is a real possibility that the put buyer will make you buy the shares at the strike. In that case, you’re not losing money until it falls to $111.30.
Over the past year, Agilent stock hasn’t traded that low, with a 52-week low of $113.28. The last time its shares consistently traded below $111 was in late 2020.
The odds are good that it might hit $115, but $111.30 is much less likely. I’m no technical analysis guru, but it does appear its shares bottomed in June.
I know what you’re thinking: Didn’t the company give its guidance on China concerns? It sure did.
On Wednesday, it said it expects revenue of $6.80 billion for its fiscal year, down from its previous guidance of $6.93 billion. On the bottom line, its earnings per share estimate has dropped by 20 cents to $5.40 at the low end of its guidance.
There you have it: approximately $130 million less revenue and 20 cents per share. The EPS estimate revision translates to less than a 4% cut in earnings.
Currently trading at 22.5x earnings, the maker of lab instruments is in value territory. Having traded near $180 as recently as September 2021, this is a good entry point.
Ford
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.
On Aug. 17, it announced that it and a consortium of companies would invest $887 million to build a plant in Becancour, Quebec, to produce EV battery materials. When the plant gets up to speed, it will be capable of producing 45,000 tonnes of cathode active materials (CAM).
“This cathode facility will supply the material that goes into Ford’s future EVs in North America, specifically some of our future trucks,” Lisa Drake, Ford vice president for EVs, told reporters.
As part of the investment, the Canadian government will make a CAD$322 million condition loan, while the Quebec government will kick in a similar amount on a forgivable basis. The plant’s expected to open in 2026.
I mention this because Ford recently reported healthy Q2 2023 earnings of $1.9 billion, a three-fold increase from a year ago. However, the iconic Detroit automaker said its EV business lost $1.1 billion on an EBIT basis during the quarter, more than double its loss in Q2 2022. In 2023, it expects EBIT losses of $4.5 billion, $1.5 billion more than expected.
Ford isn’t alone here.
Almost every company with a presence in EVs is losing money and ratcheting their production outputs lower to recognize that the uptake by consumers, especially in North America, will be slower than anticipated.
As soon as the charging networks are up to snuff in North America, EV production will rocket higher. It will take patience from investors.
The put to sell is the Sept. 8 $12 strike with a bid price of $0.38 for a net price of $11.62. That’s an annualized yield of 55.6% should its share price fail to remain under $12 by September.
With a 52-week low of $10.90, you aren’t likely to lose much on the trade, even if it falls into the low $11s. Long-term, Ford’s going to be a player in EVs.
U.S. Steel
The iconic but oft-struggled U.S. steelmaker is possibly in the final throes of being sold to one of its competitors. Who it will be, we still don’t know. However, one thing is sure: U.S. Steel’s (X) final sale price will increase.
Cleveland-Cliffs (CLF) has already offered $35 in cash and stock. That was rejected. Privately held Esmark has also made an unsolicited bid that’s been rejected by the company.
Where this goes is anyone’s guess.
However, if you sell the Aug. 25 $28.50 put, you’re looking at an annualized yield of almost 20%, with virtually no chance you’ll be asked to buy the shares. Keep selling puts weekly at a sub-$30 strike until the deal is done.
Sure, if everything goes away and there is no sale, the stock price could crater into the $20s, but by then, you might have rolled the dice on three or four occasions, pocketing more than enough premium income to account for any decline.
Consider this my M&A arbitrage bet.
Have you figured out the one thing these three stocks have in common? They all have single-letter stock symbols.
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.
