There is no question that Tesla (TSLA) is the option of choice for many investors playing in this particular sandbox. Thursday’s options trading was a typical day for Tesla.
Six out of Thursday’s top 10 options based on volume exhibiting unusual options activity were Tesla. That’s not surprising. However, what was is that TSLA had zero in the top 25 when it comes to the Vol/OI ratio.
Two stocks that make good buys did. Here are my choices, including the best option to play for each.
Banking on a Rebound
Investing in Wells Fargo (WFC) has been a challenging move for a long time. It got so bad that the world’s most patient investor (Warren Buffett) completely sold off Berkshire Hathaway’s (BRK.B) holdings in the bank in the first quarter of 2022.
Buffett first bought the bank’s stock in 1989, keeping it in the holding company’s top 10 equity positions until 2020, when the pandemic forced the billionaire’s hand. Then, he focused on Bank of America (BAC) instead. BAC is Berkshire’s second-largest holding, accounting for 8.4% of the $324 billion portfolio.
On Thursday, Wells Fargo’s April 21 $34 put had a volume of 11,493 and a Vol/OI ratio of 64.57. While the bank’s options volume was approximately double its average 30-day volume on Thursday, its daily volume has risen since Silicon Valley Bank crashed in the first 10 days of March. Every day’s volume since March 9 has been above 100,000.
Wells Fargo’s put/call volume since March 9 is evenly split between the two. That suggests investors aren’t sure where the bank is headed during this banking uncertainty.
According to Barchart.com analyst data, of the 15 covering WFC stock, nine consider it a Strong or Moderate Buy (4.06 out of 5) with a mean target price of $52.54, 48% higher than where it’s currently trading.
CEO Charlie Scharf continues to rebuild the bank after it had a cap put on its asset growth in 2018. The Federal Reserve set the cap in place after Well Fargo was found to have created at least 3.5 million fraudulent accounts for its customers without telling them.
At the end of the day, Wells Fargo is still a vast and profitable bank. In 2022, it made $13.2 billion from $73.8 billion in revenue. Yet, at the end of December, its allowance for credit losses for loans was 1.42% of total loans, lower than at the end of December 2021.
WFC is down 14% YTD. The last time it was this low was Feb. 2021.
On Thursday, if you sold an April 21 $34 put, the premium income would have been $1.06. That puts the net price paid should it be put to you at $32.94, 8.4% where it’s currently trading. If it doesn’t fall below $34 and get put to you, you’re up $106 per contract for 28 days of work. That’s an annualized return of 37% on the $34 strike price.
The Pandemic Didn’t Help EPR Properties
There is no question the pandemic hurt Kansas City-based EPR Properties (EPR). This real estate investment trust owns 289 entertainment-related real estate properties, including 172 movie theatre complexes operated by 19 different exhibitors.
Despite what happened in the pandemic years, between 1994 and 2019, U.S. annual box office revenues grew by 3.2% compounded annually. So stable growth should come back, albeit at a slightly slower pace. If you’re an income investor, this is the stability you’re after from your REITs.
The REIT focuses on providing experiences for the end-user customer, whether watching the latest Top Gun, taking in a day of skiing, or hitting a few balls at the local TopGolf with friends.
In January, EPR announced that it would provide $65 million in debt refinancing for the six social clubs operated by Gravity Haus. The membership-based clubs include coworking spaces, fitness facilities and services, spas, world-class dining, lodging, and access to local events. Gravity Haus has more than 4,500 members with locations in several Colorado ski destinations and more to follow.
EPR had a solid year in 2022, with revenue of $658.0 million and adjusted funds from operations (AFFO) of $370.3 million. Revenue and AFFO grew 23.8% and 51.8%, respectively, in 2022.
The REIT pays a monthly dividend of 27.5 cents—the annual rate of $3.30 yields a high 9.5%. If you’re more accepting of risk in your portfolio, EPR is an excellent long-term investment. Historically, there have only been three times it’s traded under $20 since going public in August 1997. So hold for the long haul and buy more whenever it dips below $20.
EPR’s June 16 $30 put had a bid price of $1.10 on Thursday. With 84 days to expiration, if its share price doesn’t get put to you come June, you’re up $110 without spending anything but the commission. On an annualized basis, your return would be 16%. Not quite as good as the WFC put, but more than plenty to wait out a lower share price.
I’ve always felt EPR was one of America's most misunderstood specialty REITs.
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.
