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Unusual Options Activity: 3 Stocks You Can Bank On

Barchart - Fri Sep 16, 3:20PM CDT
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It’s time for another edition of Unusual Options Activity. Once a week, sometimes twice, I look at the options contracts attracting unusual volume or interest. 

Sometimes, I’ll look at the options activity for a week, sometimes a day; it’s not something I decide until I’ve dug into Barchart’s data. As I write this, I see 180 call options exhibiting unusual options activity more than halfway through Friday trading180 call options showing unusual options activity. 

While the Nikola (NKLA) Sep. 30 $5 call jumps out at me with volume of 180.6x the open interest, I have no desire to wade into this troubled electric vehicle manufacturer despite the fact it’s buying lithium-ion battery startup Romeo Power (RMO) for $144 million. It’s too speculative for my liking. 

However, I like some of the call options available in the banking industry. There are four to choose from. Here are my three picks.

Happy investing!

FITB Oct. 21 $38

My first pick is Ohio-based Fifth Third Bancorp (FITB). The ask price is reasonable at $0.40. This means that FITB stock has to rise 10.6% over the next five weeks to break even. Its volume is 1,423 on the day, 7.01x open interest.

It finished Q2 2022 with $184 billion in average interest-earning assets. Commercial loans accounted for 40% of those assets, consumer loans (23%), and taxable and tax-exempt securities (37%). The bank’s interest-bearing core deposits were $102 billion. Its net interest rate spread and net interest margin (NIM) in the quarter were 2.76% and 2.92%, respectively. 

Other financial highlights in the second quarter included an adjusted return on average tangible common equity (ROTCE) of 15.2% and an efficiency ratio of 55.1%, 400 basis points higher than a year earlier. Its allowance for credit losses (ACL) was 1.85% of its loans and leases, five basis points lower than Q2 2021.

“NIM expanded, net interest income increased, and expenses decreased compared to the prior quarter, resulting in an efficiency ratio of 55% despite softer fee revenue due to the macro environment. As a result, PPNR [pre-provision net revenue] increased 13% compared to the year-ago quarter,” stated CEO Tim Spence.

What does this all mean? The bank continues to operate at a high level despite all the issues facing its consumer and business clients. 

In May, the company closed its acquisition of Dividend Finance, a San Francisco-based digital lending platform that enables residential solar power and home improvement contractors to provide customer point-of-sale loans. Dividend is expected to originate $2.6 billion in loans in 2022, up 190% from a year earlier.

Yielding 3.4%, it’s a smart play for buy-and-hold income investors. 

USB Mar. 17/2023 $50

U.S. Bancorp(USB) is a top 10 holding in Berkshire Hathaway’s (BRK.B) $332 billion equity portfolio. 

Warren Buffett’s holding company owns 137.4 million USB shares. That represents 1.9% of Berkshire’s equity portfolio and 9.2% of U.S. Bancorp’s outstanding shares. Berkshire first bought 6.1 million shares of USB in Q1 2006. By 2006, it had accumulated 23.3 million shares, valued at $843.5 million.

On Sep. 16, the Minneapolis-based bank announced that the acquisition of MUFG Union Bank, Mitsubishi UFJ Financial Group’s (MUFG) U.S. regional bank, first announced in September 2021, has extended the closing deadline from Sep. 30 to Dec. 31. 

U.S. Bank is paying $8 billion for the regional bank -- $5.5 billion in cash and $2.5 billion in stock -- which has more than 1 million customers in California and Oregon, moving USB into the 5th spot in California in terms of deposits, up from 10th. It expects to find $900 million in pre-tax synergies. However, due to the delay, it will likely obtain 75% of these savings in 2023 and 25% in 2024.

The acquisition accelerates the bank’s scale and long-term growth at an attractive valuation of 1.3x tangible book value, considerably lower than U.S. Bank’s Price-to-Book multiple of 2.2.

The break-even is $51.80, 13.0% higher than its current share price. However, it’s got half a year to meet this hurdle, which means it will have a quarter's results to report post-merger before the call expires. 

Money in the bank.    

ALLY March 17/2023 $42

My third pick is Ally Financial (ALLY). The Detroit-based financial services company started in 1919 as GMAC, lending money to automobile dealerships to pay for their inventory. A few years later, the finance arm of General Motors (GM) got into auto loans for buyers of GM’s products. 

In 2000, the company launched GMAC Bank, transforming it into Ally Bank in 2009 and then Ally Financial in 2010. In 2013, it gained financial holding company status. A year later, it went public. Today, it has more than $8.4 billion in annual revenue (2021) from 10.5 million customers, $182 billion in total assets, and $142 billion in total deposits.

Since its 2014 IPO, its tangible book value per share has grown 71% to $38.73. Ally’s shares are currently valued at 0.8x tangible book.

Warren Buffett thinks its shares are cheap. In the second quarter, Berkshire upped its position in Ally to 30.0 million shares from slightly less than nine million at the end of March. Berkshire now owns 9.7% of the bank holding company. 

However, don’t get too excited. It only represents 0.3% of the Berkshire Portfolio. In contrast, Bank of America (BAC) accounts for 10.5%, making it Berkshire’s second-largest holding.

I find ALLY to be an exciting play. The premium is just $75 per call contract. If things don’t work out over the next 182 days, you’re out less than $100 per contract. It costs more for a family of four to go to the movies. 

All three of these financial services companies have a clean bill of health. Two of the three have option buy-ins under $1. That’s where I’d lean when it comes to option buying. Long-term, I like them both. 

However, Ally strikes me as the more interesting investment, both from an options perspective and as a stock to own for the long haul.


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