The falling stock market has sent some investors stampeding for the exits, but options traders have been making big bets that some stocks are likely to score big gains by January. Among these stocks are, per a study by Goldman Sachs as summarized by Business Insider: Navistar International Corp. (NAV), Ford Motor Co. (F), Ralph Lauren Corp. (RL), Weight Watchers International Inc. (WTW), Whirlpool Corp. (WHR), Parker-Hannifin Corp. (PH), Humana Inc. (HUM) and Bank of New York Mellon Corp. (BK). The table below lists these stocks in order of the potential gains anticipated by options traders, with the biggest potential at the top.
Big Bets On Big Stock Gains
|Stock||YTD Gain||Main Business|
|Bank of New York Mellon||(13.1%)||Banking|
|Parker-Hannifin||(25.6%)||Industrial and aerospace components|
|Weight Watchers||48.1%||Weight loss, fitness|
|Navistar||(26.7%)||Heavy trucks and buses|
Source: Yahoo Finance for YTD share price gains through Oct. 25 based on adjusted close data.
Significance for Investors
Goldman looked at options contracts expiring in Jan. 2019 to determine which stocks are expected to rise the most through that time. Their analysis compared the premiums being paid to buy call options on these stocks, which offer upside potential, to the premiums being paid to buy put options, which offer downside protection. The more expensive that calls are relative to puts, the more bullish is the overall sentiment among options traders regarding a given stock. Fundamentals surrounding Humana, Bank of New York Mellon, and Weight Watchers are discussed below, as illustrative examples.
Humana is one of the largest health insurers and health plan administrators in the U.S., with expected earnings growth of over 21% for 2018, per Zacks Equity Research. With Democrats widely expected to score big gains in the upcoming midterm elections to Congress, this is likely to result in an expansion of Medicaid and health maintenance organizations (HMOs), which, in turn, should be boost for Humana, per Zacks.
While Humana is up sharply YTD, "option investors appear to be positioning for the potential that recent outperformance can continue." —Katherine Fogertey, Goldman Sachs analyst
Source: Business Insider
Bank of New York Mellon beat earnings estimates for 3Q 2018 by 1.9%, and EPS was up by 12.8% year-over-year (YOY), per Zacks. Provisions for credit losses were reduced in the quarter, adding to earnings, assets under custody or administration (AUM) were up 7% YOY, and share repurchases worth $602 million took 12 million common shares off the market, giving another boost to EPS. Bank of New York Mellon plays a critical role in the global financial system, as a leading custodian of financial assets and virtually the monopoly provider of clearing services for the $2.2 trillion repo market in the U.S., per the Securities Industry and Financial Markets Association (SIFMA).
Weight Watchers has rebranded itself as WW, reflecting declining interest in dieting programs, and increasing consumer preference for wellness programs, CNBC reports. With 4.5 million subscribers, the company is looking to appeal to fitness-conscious people who have no need or desire to lose weight. It also needs to defend its core business against free apps that allow weight-conscious people to track their calories. Revenue peaked in 2012, but began to rebound under new CEO Mindy Grossman in 2017.
The case for Humana rests partly on expectations of health care legislation that expands the Affordable Care Act (ACA), popularly called Obamacare, that may or may not advance, depending on the election results. Competition, as well as trends in consumer spending, are key for Ralph Lauren, Whirlpool, Weight Watchers and Ford. The macroeconomic backdrop and industrial production drive sales for Parker-Hannifin and Navistar, the company formerly known as International Harvester. Bank of New York Mellon should benefit from rising interest rates, but its virtual monopoly on the clearing of repo transactions is a double-edged sword, both a steady source of profits, but a huge risk in the event of a major systemic failure that may open up liabilities.