It’s my final Barchart.com article of 2022. I cover unusual options activity from the previous day's trading every Friday. 

On Thursday, there were 17 call options with 365 days to expiration or longer experiencing volume significantly higher than the open interest at the start of yesterday’s trading.

As we head into 2023 with a possible recession on the horizon, the S&P 500 has already locked in the worst annual return since 2008. IPOs, whether the traditional kind or SPACs (special purpose acquisition companies), 2021’s hottest commodity, fell off a cliff in the past year. 

Where the markets head in 2023 is anyone’s guess. But, more than ever, owning quality companies is going to be essential to making money from your investments in the year ahead 

Three companies exhibiting unusually high options activity on Thursday are worthy of your long-term investment. 

Happy New Year to all of Barchart.com’s readers.

Altria Group Cools on Cannabis

Altria Group (MO), the manufacturer of Marlboro cigarettes, announced on Dec. 19 that it abandoned its warrant to purchase additional shares in Cronos Group (CRON). 

The tobacco company acquired a 45% interest in the Canadian licensed cannabis producer in March 2019 for $1.8 billion. In addition to the share purchase, it received a warrant to purchase more shares at CAD$19.00 ($14.03) over the next four years. As a result, Altria’s ownership would increase to 55%, a controlling interest if exercised. 

In hindsight, we know that the cannabis industry has taken it on the chin in the 45 months since. With Cronos shares trading below $3, hanging on to the warrant made no sense. By abandoning the warrant, it will take a capital loss of $483 million in 2022. 

This means it will reduce its taxes in a year in which it’s expected to earn $4.85 a share at the midpoint of its guidance, 5.2% higher than in 2021. Based on its current share price -- its shares are down a market-beating 4.2% year-to-date -- it trades at 9.5x and 9.1x its 2022 and 2023 earnings.

Analysts aren’t so enthusiastic about Altria. Of the 12 covering it, only four rate it a Moderate or Strong Buy, with two giving it an outright Sell.  

However, if you’re a long-term investor, the fact that it’s not adding to its Cronos position is a good thing. The cannabis industry is still a very long way from being a mature industry. Politico reported that in 2022’s first half alone, the 20 largest publicly-traded cannabis companies lost a combined $550 million on $4.5 billion in revenue.

If for some reason, Cronos can revive its fortunes in 2023, Altria owns 41% of its stock, and MO shares should benefit. At the end of September, its investment in Cronos had a carrying value of $416 million, about one-quarter of what it paid in 2019. However, it’s not nearly as bad as its investment in Juul Labs. That’s been an unmitigated disaster. 

What remains compelling about Altria is its free cash flow. In the trailing 12 months ended Sept. 30, it was $8.09 billion. Based on a market cap of $82.25 billion, it has a free cash flow yield of 9.8%. I consider anything above 8% to be in value territory. 

A lot can happen in 750 days. Altria’s Jan. 17/2024 $52.50 call contract had a $268 premium on Thursday, just 5.1% of its strike price. Its share price has to rise 21% over the next two years to break even. 

I like its chances.

Party Like It's 1993

Carnival (CCL) stock hasn’t traded this low since 1993. It’s hard to believe the operator of cruise ships once traded around $70. Now, approaching penny-stock status, Carnival’s scared away most sane investors. 

However, I can see why options buyers were taking small bites out of Carnival’s June 21/2024 $5 call contract on Thursday. With an ask price of $4.60, its shares have 18 months to increase by 19%. From its April 2020 low of $8.49 to its June 2021 high of $30.54 -- less than 18 months -- its shares jumped 260%.

While I usually don’t highlight call options whose premium accounts for more than 20% of its strike price, in Carnival’s case, it’s more than possible.

I have a friend who’s headed out on a cruise in mid-January. He’s not going on a Carnival boat, but he will drop a decent amount of money to get a higher-end cruising experience. With shows like Below Deck becoming popular, cruises allow the average person to live a little without breaking the bank.

Carnival’s stock has lost more than 62% YTD. So reversion to the mean is bound to kick in at some point. 

Stifel Nicolaus analyst Steven Wieczynski suggested just before Christmas that Carnival’s 2022 decline makes it an “overly compelling” buy. 

“At this point, we believe the setup for CCL [Carnival’s stock] heading into 2023 is overly compelling,” MarketWatch reported the analyst’s comments. “CCL has essentially derisked most of 2023, and post today, estimates should get reset to levels that we believe should be achievable/beatable.”

The analyst has a Buy rating and an $18 target price. If CCL hits the target 12 months from now, the premium should be nearly 200% higher than a 125% increase in its share price.  

The risk/reward is tilted in the call buyer’s favor.

Infrastructure Spending to Keep Rising

It’s been an excellent year for Caterpillar (CAT) stock, up more than 15% YTD and nearly 26% better than the Dow Jones Industrial Index. In addition, as Barron’s recently pointed out, the S&P 500 Industrial Sector SPDR (XLI) is up more than 18% since hitting a 52-week low of $82.75 in late September. 

Industrial stocks like Caterpillar are ready to carry their momentum into 2023.

The company reported excellent Q3 2022 results at the end of October, including a 21% year-over-year increase in revenues to $15.0 billion and a 48% increase in adjusted EPS, to $3.95. Its earnings were 25% higher than analyst estimates. 

Driving its revenue growth were double-digit increases from its Construction and Resource segments, which account for 57% of Caterpillar’s revenue, and 59% of segment operating profit. That’s despite mediocre results from Europe, Africa, and Asia. 

The analyst estimates for 2022 and 2023 earnings are $13.85 and $15.26. Based on its current share price, it’s trading at 15.6x the 2023 estimate. Put another way, that’s an earnings yield of 6.4%, its highest level since 2019.

On the surface, the Jan. 19/2024 $330 call contract doesn’t seem like a great buy. The $810 premium means its shares have to increase 41% over the next 386 days to break even. That’s a lot to ask from a market that could go sideways in 2023.

However, were it to achieve 41% appreciation, the premium could be worth as much as $2,900, 262% higher than the current ask price. That’s the leverage advantage you get by using options. 

If you’re not very risk-tolerant, this probably isn’t an appropriate call option.

 

More Options News from Barchart

• Unusual Options Volume for Jefferies Financial (JEF) Poses Questions
• Selling Covered Calls On The Dogs Of The Dow Stocks
• 2 Under the Radar Stocks With Unusually Active Options Worth Buying   
• Are SPACs Making a Comeback in 2023? Perhaps Not Yet.

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.