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Play These Unusually Active Options From Last Quarter’s Worst Performers

Barchart - Fri Oct 6, 2023

We’ve come to the end of another week of trading. What a week it's been.

As I write this on Friday morning, the major indexes are down again. If these losses hold up, the S&P 500, Dow, and Nasdaq-100 will lose 1.33%, 1.45%, and 1.12%, respectively. They’re all down at least 4.5% for the past month, with the Dow in negative territory for the year. 

Oh, how the tide has turned since the markets hit 2023 highs in mid-July. 

On Wednesday, Morningstar.com published an article about the five worst-performing U.S.-listed stocks it covers. A few of them are exhibiting unusual options activity. 

You can make a buck or two from their misfortune. Here’s how. 

Farfetch

The luxury online apparel and footwear e-commerce platform had the worst performance of the five stocks, down 65.4% in the third quarter. That compares with a 3.3% loss for the S&P 500. 

There is no question that Farfetch (FTCH) is the place to shop online if you’re looking for luxury goods. It has more than 4.1 million active consumers purchasing products from more than 1,400 luxury sellers. 

Higher interest rates have certainly slowed conspicuous consumption in the U.S. 

“U.S. weakness doesn’t come as a surprise, given our prior expectations for a significant weakening of luxury demand in the country after very strong post-pandemic growth. Most luxury names under our coverage reported declines in revenue in the North American markets during the quarter,” wrote Morningstar senior equity analyst Jelena Sokolova. 

Morningstar prefers Zalando (ZLNDY), a German online apparel and footwear platform with considerably more customers, revenues, and sound financial statements. However, it trades over the counter, so Farfetch it is. 

The company reported its second-quarter results in mid-August. Its gross merchandise volume was $1.02 billion, 7% higher year-over-year, with revenue of $579.3 million, 1.3% higher than a year ago. Unfortunately, it lost $30.6 million on an adjusted EBITDA basis, 26.4% higher than Q2 2022.

Currently trading for less than $2, Morningstar gives Farfetch a fair value of $11.40. 

While volume is light on Friday, the Dec. 19/2025 $1 call has a Vol/OI ratio of 3.0. I consider anything over 1.25 to be unusual options activity. With 805 days to expiration, Farfetch has plenty of time to get its act together. With an ask price of $1.30, its share price has to appreciate by 26% over the next two years for you to consider exercising your right to buy 100 of its shares. 

However, at $130, what have you got to lose?

Hawaiian Electric Industries

Hawaiian Electric Industries (HE) is the utility everyone loves to hate. And rightfully so. The company faces class action lawsuits that blame it for the August Lahaina fires that killed 115 people and burned over 2,000 acres. 

The proposed class action lawsuit argues that the utility should have shut down the power lines knocked down by high winds. Moody’s estimates that the economic losses could run upwards of $6 billion. Unfortunately, Bloomberg reporting suggests that HE only has $165 million in general liability insurance coverage. 

HE stock had the second-worst performance in the third quarter, losing 65.0%, most, if not all, after the Aug. 8 fire. On Aug. 28, the company suspended its dividend to conserve cash on its balance sheet. It also has drawn $370 million of its $375 million unsecured credit facility. All three of the credit ratings agencies have downgraded the utility.

Maui County, where Lahaina is located, is also suing Hawaiian Electric. Things are bleak. 

Morningstar has a fair value estimate of $13. That’s $1.44 higher than where it’s currently trading. 

“Shareholders will need to be comfortable with a wide range of outcomes due to potentially significant liabilities from recent wildfires in Maui,” wrote Morningstar strategist Andrew Bischof. 

I wouldn’t bet on this company, whose share price traded near $50 as recently as February 2020.

But if you can, the Mar. 15/2024 $5 put had a Vol/OI ratio of 4.35 on Thursday, with 5,008 put contracts trading. Sell one of those, and you could generate nearly 7% yield on an annualized basis. 

Alternatively, buy an Oct. 13 $12 call with one week to expiry -- its volume on Thursday was 504, 3.76x its open interest -- and the ask was $0.40, or 3.3% of the strike. If it moved 96 cents higher from its $11.72 closing price yesterday, you could double your money by selling the option before next Friday’s expiration. 

Both are more income-focused propositions. 

Chewy

I’m not a fan of Chewy (CHWY). It reminds me of a pet-related version of Wayfair (W) in that it struggles to make money consistently. CHWY stock lost 53.7% of its value in the third quarter. 

While I don’t like it, Morningstar gives it a $42 fair value. 

“The pet care industry remains challenging, with sluggish new pet household formation, increasing price sensitivity, and an uptick in industry promotional activity pinching results. Nevertheless, we take a sanguine view of Chewy’s prospects, with the firm’s large auto-ship user base and plenty of nascent initiatives paving the way toward long-term excess returns,” stated equity analyst Sean Dunlop. 

Their positive argument also focuses on the online retailer’s margins from its sponsored ads pilot it's running in 2023.  

In Q2 2023, its revenues were 14.3% higher, to $2.78 billion, with adjusted net income of $63.3 million (2.3% margin), up from $1.2 million a year earlier. 

Morningstar is a lot more enthusiastic about Chewy’s business than I am. If you want 2-3% net margins, buy Kroger  (KR)  shares or another grocery store chain.

However, if you like Chewy’s business, selling the Jan. 19/2024 $35 put is appealing. With 106 days to expiration, yesterday's bid was $16.50, an annualized yield of 162.2%. However, trading below $19, you’ve got to be very confident it won’t fall any more in 2023. 

I can’t help you with that one.    


 

 







 



 



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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.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.