Every Thursday at Barchart.com, I discuss unusual market options activity. Often, the stocks I reference relate to current news. Without much going on in the world on this day, I decided to get lean on Sesame Street for inspiration.
In 2000, Random House published “Brought to You by the Letter C,” a storybook about a “C-Monster” that menaces a port city demanding all the cookies in the town. The series was intended to teach kids about the alphabet. Who doesn’t love Sesame Street?
Anyway, it gave me the idea to discuss three options with unusual options activity whose stock symbol starts with the letter C.
Here are my three choices.
Cleveland Cliffs
Cleveland-Cliffs (CLF) produces iron ore pellets and flat-rolled steel. Its stock is down more than 8% year-to-date.
The option in question is selling the July 21 $14.50 put with a $0.23 bid price. The annualized yield is 36.0% with 15 days to expiration. Currently trading at $15.39, the odds of it falling below $14.50 over the next two weeks doesn’t seem all that great, having closed below this level on just seven occasions in the past six months.
Therefore, this put is more of an income play than a chance to buy its shares at a lower price.
Why would someone want to own CLF?
Well, as I said, it is a big producer of flat-rolled steel, which is vital to this country's automotive businesses. In addition, it has reduced its net debt and post-retirement liabilities over the past 24 months by 45%. Its long-term debt is still quite high at $4.56 billion as of March 31. That’s a high 58% of its market cap.
Through the two acquisitions it made in 2020 -- AK Steel and ArcelorMittal USA -- Cleveland-Cliff’s business has grown from $2 billion in annual revenue (2019) to $23 billion (2022). It’s a completely different business that should benefit greatly from North America's electric vehicle sales growth over the next five years.
By virtually every financial metric, it’s cheaper than over the past five years. As recently as 2011, CLF stock traded around $100. It’s not going back there anytime soon, but buying its stock at a net price of $14.27 a share should reap financial gains over the long run.
Comerica
Comerica (CMA) stock is down 37% year-to-date. The financial services business operates in Texas, California, Michigan, the Southeast, and Mountain West. Its loans in Texas, California, and Michigan account for 80% of its $53.5 billion in loans, with its Commercial Banking business accounting for 86% of its loan portfolio.
As long as the economies in those three states keep performing, their shareholders have nothing to worry about. But that can change in a hurry.
In the first quarter of 2023, it reported decent, if not spectacular, results. Its net interest income in Q1 2023 was $708 million, $34 million less than Q4 2022 but $252 million higher than Q1 2022. As a result of the slight dip in net interest income, its net interest margin fell 17 basis points in the quarter to 3.57%.
Like many regional banks, Comerica’s customers moved some deposits to other institutions during the Silicon Valley Bank meltdown in March. As a result, the first quarter saw its uninsured deposits decrease by $10.5 billion to $35.0 billion. Excluding affiliate deposits, uninsured deposits accounted for 47% of its $67.8 billion in average deposits.
“[R]elative to pre-pandemic, we have a higher level of deposits, a better loan to deposit ratio and a lower percentage of uninsured deposits. Our business model was tested, and we emerged in a better position for long-term success,” stated CEO Curtis Farmer in its Q1 2023 press release.
So, taking these comments at face value, Comerica’s price-to-forward-earnings ratio of 5.38x is as low as it’s been in a decade.
The option in question for Comerica is the July 14 $40 put. It’s got a bid price as I write this of $0.60, which is a 1.4% yield based on its current share price of $41.54. On an annualized basis, the yield is a healthy 63.9%.
Whether it moves $1.54 lower over the next eight days is immaterial. If it does, you buy the shares at $39.40. If it doesn’t, you pocket some nice premium income.
Crocs
Crocs (CROX) stock has done little in 2023, up less than 3%. However, you're likely pleased if you’ve owned the stock for over a year. It’s gained 109% over the past 52 weeks and 553% over the past five years.
I’m considering selling the Jan. 17/2025 put with a bid price of $18.50. With 561 days to expiration, it has an annualized yield of 11%, making it the lowest of the three and the most realistic relative to current interest rates.
At a current price of $109.67, the footwear company’s stock would have to fall 8.8% over the next 20 months to have the shares put to you. Given it traded as low as $51.63 a year ago, it’s more than possible.
That said, it isn’t very likely. Crocs' business is operating at a very high level of efficiency. In late April, it reported 34% revenue growth year-over-year, with a 105.% increase in net income.
Given the strong quarter, it raised its guidance for 2023. It now expects revenues to grow by 12.5% at the midpoint, to at least $3.95 billion, with adjusted earnings per share of between $11.17 and $11.73. That’s a P/E below 10x.
Of the three stocks, Crocs would be my choice as the best long-term hold.
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