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Reading Between the Lines: Why Hilton's (HLT) Surge May Not Be What It Seems.

Barchart - Tue Oct 17, 2023

Although the catalyst of “revenge travel” has been the gift that keeps on giving, it’s right to wonder how long the phenomenon can sustain itself. With upscale hotel brand Hilton Worldwide (HLT) witnessing a significant spike in derivatives contract volume, investors may be led to believe consumers will continue opening their wallets for new experiences. Still, HLT stock might be an aggressive wager for the bulls.

At first glance, broader dynamics seemingly support the optimistic case for the world-famous hotel brand. Since the beginning of the year, HLT stock gained 23% of equity value, a noticeably superior performance to that of the S&P 500 index, which moved up about 14.4% during the same period. Confirming the northbound sentiment, the Barchart Technical Opinion indicator rates HLT a 72% strong buy.

Even better, Wall Street analysts tip their hat in approval of Hilton, pegging shares a moderate buy. This assessment breaks down as five strong buys, two moderate buys and eight holds. Also, it’s worth noting that the mean price target comes in at $162.47, representing roughly 6% upside from Monday’s close. Also, the high-side target stands at $180, implying 17% growth.

Significantly, analysts’ downside risk target sits at only $148, implying just under a 4% potential loss. Of course, analyst targets aren’t guarantees by any stretch of the imagination. Still, as an approximate benchmark for establishing a risk-reward profile, HLT stock seems attractive.

Further, recent options trades present another possibly bullish wrinkle to the story. Nevertheless, investors will want to consider the bigger picture before diving in.

HLT Stock Presents a Nuanced Framework

Following the close of the Oct. 16 session, HLT stock represented one of the top highlights in Barchart’s screener for unusual stock options volume. Specifically, total volume came in at 38,499 contracts against an open interest reading of 74,636. Further, the delta between the Monday session volume and the trailing-month average metric stood at 1,090.81%.

What really raised eyebrows was the transactional difference. Call volume soared to 37,999 contracts while put volume only sat at 500 contracts. This pairing yielded a put/call volume ratio of only 0.01. With call holders enjoying the right (but not the obligation) to exercise (buy) the underlying security at the listed strike price, the implication seems incredibly bullish.

Nevertheless, a face-value interpretation of unusual options dynamics may be misleading. If institutional investors are writing (selling) options, the incentive is flipped; that is, options writers have the obligation (but not the right) to fulfill the terms of the contract. Thus, if an option goes in the money (ITM), the writer is obligated to execute under contract exercising: call writers must sell the underlying security while put writers must buy at the listed strike.

As for the unusual volume on Monday, Fintel’s screener for options flow – which exclusively targets big block trades likely made by institutions – shows that the last significant transaction occurred on Sept. 26. Also, I consulted other resources’ datapoints regarding options flow and none of them to my knowledge listed HLT stock as a big block trade on Oct. 16.

Put another way, the available evidence suggests that the high-volume spike in Hilton options stemmed from retail traders. And that adds a nuance to the proceedings.

Among the institutional transactions that were recorded in the second half of this year, most of them have a bearish tilt; either bought puts or sold calls. Notably, for options expiring Jan. 19, 2024, major traders are selling calls at the $150 and $165 strike prices.

Essentially, the smart money is betting that HLT stock will not hit or reach appreciably above this range. Given that shares already trade at nearly $154 in the open market, that’s an aggressive wager to leave in an open position. It also might be a shrewd one.

Hilton May Suffer a Diminished Addressable Market

Looking at the broader trend, circumstances might appear overall favorable for HLT stock. In particular, a hotter-than-expected jobs report defied economists’ predictions, which on surface level is a positive for travel-related enterprises. Still, this also means more dollars are chasing after fewer goods, which is inflationary.

Because the Federal Reserve’s main priority is to mitigate skyrocketing consumer prices, the hot labor print likely only accelerates the probability that policymakers will raise interest rates again. If so, that could have a massive impact on corporate layoffs. With consumer confidence low compared to pre-pandemic norms, Hilton could fall victim to the trade-down effect.

Yes, it is an upscale hotel. However, it’s not extraordinarily upscale enough to serve the uber-rich. Instead, Hilton targets middle to senior-aged professionals. And while these folks command a much higher-than-average income, they’re also incredibly vulnerable to layoffs. Thus, with institutional investors selling calls, I’d tread carefully with HLT stock.

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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.

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