Good Friday begins the holiest of weekends, culminating with Easter Sunday. Whether religious or not, try to enjoy the weekend with some chocolate. Everyone deserves a treat once in a while.
The Federal Reserve released its February PCE (personal consumption expenditures index) data as I write this. For the second consecutive month, the PCE index nudged higher, up 0.3%, one-tenth of a basis point less than The Wall Street Journal’s poll of economists.
At the same time, the yearly inflation rate was 2.5%, up from 2.4% in January. That uptick is the first since last February, which suggests the Fed’s unlikely to start cutting interest rates anytime soon.
Fortunately, the markets are closed so that it won’t affect the stock or options markets until Monday.
In the meantime, I have found two penny stocks whose options were unusually active in Thursday trading and are worthy of aggressive investors’ closer examination.
Happy Easter!
The Beauty Health Co.
The Beauty Health Co. (SKIN) is a California-based beauty company. Its main brand is HydraFacial, which uses patented wand technology to cleanse the skin, remove impurities from the pores, and moisturize it.
It has two other brands: SkinStylus, which stimulates collagen and elastin production through microneedling your skin, and Keravive, which cleanses, exfoliates, and hydrates your scalp.
The company generates money from selling its Hydrafacial Syndeo device and consumables such as tips, solutions, and serums. Recurring revenue is always welcome.
In 2023, its sales rose 8.8% to $398.0 million, with a GAAP loss of $100.1 million and adjusted EBITDA of $24.3 million, down from $46.1 million a year ago. Consumables accounted for 48.1% of its sales, up from 43.6% a year earlier. They increased by 19.9% year over year, partly offset by flat sales of its Syndeo delivery systems.
In November, its shares hit a 52-week low of $1.35. They have since rebounded, closing Thursday trading at $4.44. SKIN traded near $30 in November 2021.
Its business's most significant negative aspect is that it doesn’t know how to make money. The last time it had an operating profit was in 2019. As a result, it has an accumulated deficit of nearly $500 million. The good news is that it generated positive cash flow in 2023, finishing the year with $523 million on its balance sheet.
It would be higher, but it has used $190 million over the past two years to buy back its stock. In 2023, it repurchased $30.2 million of its stock at an average price of $2.90. In 2022, it repurchased $160 million at an average price of $8.53.
The best news: The company appointed Marla Beck as its permanent CEO on March 12 after she had served as interim CEO since November. Beck joined the company’s board in June 2022. As the founder and former CEO of Bluemercury, a luxury beauty retailer she sold to Macy’s (M) for $210 million in 2016, she was more than capable of the interim tag and deserving of the permanent position.
SKIN had two unusually active call options on Thursday. The first is the April 19 $4 call, and the second is the Jan. 17/2025 $10 call. I like the 2025 call. It’s a down payment of 5.5% with 295 days to expiration. The delta of 0.30049 means you can double your money on the call with a $1.83 (41%) increase in its share price.
Worst-case scenario, you’re out $55 per contract.
Sirius XM Holdings
I’m not a big fan of Sirius XM Holdings (SIRI) products. My wife had it in her vehicle, but it was nearly twice as expensive as Spotify (SPOT), so we dropped it. However, I’ve always liked the stock because it tended to trade between $5 and $10. You could pick up some stock whenever it fell to the low end of this range. But now it’s trading below $4, and it’s definitely worth a sniff in penny stock territory.
You may have read about Berkshire Hathaway (BRK.B) buying more Liberty SiriusXM, the tracking stock for SIRI. Berkshire now owns 27% of the tracking stock, which comes in both Series A voting (LSXMA) and non-voting (LSXMK). Berkshire’s stake is valued at $2.5 billion.
One of Warren Buffett’s investing lieutenants, Ted Weschler, is apparently behind the buyer. Berkshire is trying to take advantage of the upcoming merger of the tracking stock with SIRI. Buffett’s firm will receive 8.4 shares of SIRI for each share of the tracking stock.
Based on 327 million shares outstanding for the tracking stock, its shares will get 2.75 billion SIRI shares in the combination. That will increase SIRI’s shares outstanding by 72% to 6.59 billion. Berkshire would own 740 million SIRI shares for 11% of the combined company.
The move is being made to simplify the ownership structure. With Buffett becoming its largest shareholder, it won't remain a penny stock for much longer.
The July 19 $4.50 call had a Vol/OI ratio of 3.18 on Thursday. It expires in 112 days after being combined with the tracking stock. The down payment of 3.1% ($0.14 ask) is very reasonable. To consider exercising your right to buy at $4.50, the shares will have to appreciate by 20% ($0.76) over the next four months. To double your money on the call by selling before expiry, it has to increase by 13% ($0.51) over the next 112 days.
To me, that’s a slam dunk. Of the two stocks, it’s the surer thing.
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.
