Sleeper Kimco Realty (KIM) Finally Starts the Fireworks Show

Josh Enomoto - Barchart - Mon Dec 4, 2023

Earlier this year in August, I stated that Kimco Realty (KIM) appeared an intriguing longer-term investment based on institutional options market activity. Initially, my assessment went flat, then horribly wrong. However, since late October, KIM stock has put on quite a show. For investors concerned about what may happen with the economy, Kimco could be the ideal place to consider parking some of your money.

Admittedly, I’m a bit hesitant to discuss KIM stock given the wild ride it took investors since the first time I discussed the enterprise, which is structured as a real estate investment trust (REIT). Nevertheless, two factors appear to boost the bullish narrative, thus undergirding confidence in Kimco.

First, the company delivered the goods for its fiscal third-quarter earnings report. According to an AP report, Kimco stated that funds from operations (FFO) reached $248.6 million or 40 cents per share. According to nine analysts surveyed by Zacks Investment Research, the consensus called for 39 cents per share. Further, the REIT posted net income of $112 million or 18 cents per share.

Second, fundamental factors seem cynically favorable for Kimco, which primarily focuses on grocery-anchored shopping centers. Although the economy continues to chug along, there are some subtle signs that consumers may be hurting. For example, in the October jobs report, employers pulled back on hiring, adding 150,000 jobs compared to the prior month’s 297,000 employment opportunities added.

Further, the much-vaunted revenge travel phenomenon may be fading. Data from Morning Consult shows that travel intentions – while rising in several countries – are flatlining or falling in certain other countries, particularly those in Europe. Given similar social structures, it’s not that much of a stretch to assume that the U.S. market could also incur a dip in travel-related demand.

KIM Stock May Benefit from Short-Covering Speculation

Overall, then, discretionary spending may decline following the holiday season, especially as the gift-giving cycle’s euphoria fades. Inflation remains stubbornly high, as are borrowing costs. Collectively, Americans hold a record amount of credit card debt. When other headwinds like mass layoffs converge, the non-essentials will likely be cut from the household budget.

But what can’t be cut? The basics like food and water. With Kimco tied to the grocery retail industry, KIM stock could potentially continue outperforming. And that’s where Barchart’s unusual stock options volume screener becomes quite enticing.

Following Friday’s close, KIM stock represented one of the top highlights, with volume reaching 4,329 contracts against open interest of 8,050 contracts. Compared to the trailing one-month average metric, the Friday volume stat represented an increase of 1,051.33%. Even better on an aesthetic level, call volume hit 4,226 contracts versus put volume of only 103.

At face value, that seems incredibly bullish for KIM stock and it would align with the broader narrative discussed earlier. However, Fintel’s screener for options flow – which exclusively targets big block transactions likely made by institutions – shows that major entities sold 2,303 contracts of the Jan 19 ’24 20.00 Call. Stated differently, the alpha dogs are underwriting the risk that KIM will not materially exceed $20 by Jan. 19.

That seems an incredibly bold move. On Friday, KIM stock jumped nearly 4%. During the trailing five sessions, it swung up more than 7%. Bullish traders appear eager in attempting to blow up this sold call and it’s understandable why.

In August, institutional traders sold $15 puts that also expire on Jan. 19, reflecting a belief that the bottom may have already been printed in KIM stock. More importantly, call writers (sellers) have the obligation to fulfill the contract under exercise. If KIM continues to rise higher from here, the bears may be forced to cover their short position.

That would be bad news for the pessimists but an excellent opportunity for the bulls.

Decent Value, Great Yield

To close, KIM stock isn’t just about betting on a cynical fundamental narrative nor gambling on options market dynamics. First, it trades at a decent valuation relative to FFO of 12.66X. It’s not a blistering bargain but the median for REITs comes in at around 13.1X.

However, what could ultimately convince investors to make the leap in KIM stock is the forward dividend yield. At 4.79%, it’s not particularly robust compared to the real estate sector’s average yield of 4.46%. Still, it’s a much better yield than you would get in many other companies. Beyond that, Kimco is arguably supremely relevant, catering to the core needs of consumers.

And that demand profile is effectively permanent unless humans find a way to live without nutritional sustenance. So, KIM stock may be a worthwhile buying opportunity.

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On the date of publication, Josh Enomoto 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.