August officially has become a dead month for investors. 

As we head into the final long weekend of the summer, the S&P 500 is coming off a 1.6% drop in August, its first losing month since February. A year ago, the index did even worse, losing 4.1%. 

Maybe it’s the idea of the kids going back to school. Although, as someone who doesn’t have kids, I think that would be a good thing. The reality is that August traditionally has been a lousy month to make gains. According to CNBC, the index has averaged just a 0.1% gain in August over the past 10 years. Over 20 years, it’s even worse, losing 0.1% on average.   

To put the past month in the rearview mirror -- and get September off on a positive note -- I’ve put together two stocks exhibiting unusual options activity late in Friday morning trading that look enticing but are sucker bets in disguise. 

Happy Labor Day weekend!

Chewy - Sept. 15 $24.50 Call

Chewy (CHWY) crapped the bed on Thursday, losing more than 12% of its value. The cause of the investor discontent was management’s admission that consumers were trading down to lower-priced items. Further, it expects customer growth to remain elusive throughout the year. 

“Commentary suggests greater uncertainty on the ability to return to positive active customer growth in 2H. This has represented a key investor concern in our conversations, which is now likely to persist through at least Q4,” Barron’s reported Oppenheimer analyst Rupesh Parikh’s comments in a note to clients. 

Over the past 12 months, Chewy has lost approximately 100,000 active customers. That’s less than 0.5% of the customers it had a year ago at the end of the second quarter. The reason it’s a big deal is because the company’s profitability sucks. It needs all the customers it can get. 

Using the most liberal profit from its Q2 2023 results, Chewy’s adjusted EBITDA was $86.9 million, or 3.1% of its $2.78 billion in revenue. Over the first six months of 2023, it was slightly better at 3.5%. In Q1 2024, Kroger’s (KR) was 5.0%, 190 basis points higher. You expect low margins from grocery stores. You don’t from online retailers that sell high-priced pet food, etc. 

I consider Chewy the Wayfair (W) of pet care. Excellent top line, lousy bottom. And it will stay that way. 

As for the  Sept. 15 $24.50 call, it has a $0.57 ask, and it expires in 14 days. Should you exercise your right to buy CHWY stock, you’ll pay $25.07, 77 cents higher than its current share price. 

The problem is that despite losing 35% of its value in 2023, it’s still too expensive. It trades at 0.95x sales, more than 4x Kroger’s P/S ratio of 0.23x, and it's more profitable.

This is not a buy-on-the-dip moment. 

Manchester United - Oct. 20 $28 Call

Manchester United (MANU) was dead money for the better part of four years until the controlling Glazer family announced last November that it was exploring strategic alternatives for the UK soccer club. The stock jumped about 75% on the news. Ever since, it’s traded between $20 and $25.   

On Aug. 14, speculation surfaced that the Glazers were ready to announce the sale of the club for as much as 7.3 billion British pounds ($9.2 billion). That figure includes the assumption of approximately $1.2 billion in debt. The Glazers own 69% of the company’s shares, so that they would be the primary beneficiaries of any deal. 

The math -- based on 163 million shares outstanding -- says the deal would be worth approximately $49 a share, more than double its current price. I find that very hard to believe. The club’s annual revenue is 600 million British pounds ($755 million), nearly 11x sales.  

Sheikh Jassim bin Hamad Al Thani has already offered $7.6 billion since the third-round bids were due in April. The market cap would be $6.4 billion, or $39 a share, excluding the debt. That seems more reasonable. 

So, why do I think the Oct. 20 $28 call is a sucker bet?

Well, you’ve got an ask price of $0.95. That brings the price you’d pay to $28.95. It still looks like a good deal based on $39 a share for a sale. 

The problem is that the deal has to happen before the 49 days are up and the call expires. If it’s announced one day after Oct. 20, you’re out $95. That’s not a lot for the chance to make $10 a share, but it is something to think about. 

At the end of the day, I have to wonder why the share price hasn’t moved above $25 in 2023. That suggests either investors don’t believe the Glazers will ultimately sell the club or that it’s not worth more than $25 in a sale.

While this is an M & A arbitrage possibility, there are better situations to get behind than this one: iconic history and all.

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