With investors digesting key reports regarding inflation and their ultimate impact on monetary policy decisions, several optimists found a seeming opportunity in LendingTree (TREE), a popular online lending marketplace. Notably, the consumer price index for June came in lower than economists anticipated. However, the consensus among experts is that prices haven’t declined enough for the Federal Reserve to forego interest rate hikes.
At first glance, the prospect of higher interest rates doesn’t bode well for many if not most publicly traded enterprises. After all, if borrowing costs rise, such a framework crimps individual corporations’ expansionary efforts. Subsequently, companies often have little choice but to initiate mass layoffs to protect their bottom line. Preservation, then, rather than outright financial performance guides the narrative.
However, for companies related to the business of lending and providing credit, higher interest rates translate to increased profitability, all other things being equal. Obviously, banks would rather have you sign on the dotted line for a 6% mortgage as opposed to a 3% one. From this angle, TREE stock might appear as an intriguing speculative wager, as Stocknews.com recently proposed.
Adding to the potentially bullish aura, LendingTree shares gained almost 9% on Wednesday. Over the trailing five sessions, TREE stock swung up almost 20%. Plus, with the U.S. labor market continuing to print resilient numbers, should investors take a shot with the lending marketplace?
Options Traders Present Mixed Signals for TREE Stock
To better gauge the trajectory of LendingTree, market participants should consider indicators such as unusual stock options volume. Should extraordinary changes in volume materialize in the derivatives arena, it could signal that the smart money may be anticipating big moves ahead.
Following the close of the July 12 session, total options volume for TREE stock reached 4,060 contracts against an open interest reading of 8,078. Further, the delta between the Wednesday session volume and the trailing one-month average metric came out to 537.36%.
Drilling down, call volume hit 2,927 contracts while put volume came in at 1,133 contracts. This pairing yielded a put/call volume ratio of 0.39, favoring the bulls. However, Barchart notes that the put/call open interest ratio stands at a rather gaudy 2.35, indicating bearish sentiment.
From Fintel’s stock options flow screener, TREE stock attracted some pessimism in March of this year. However, last month, sentiment shifted in the positive direction.
Further, the research platform’s historical implied volatility (IV) notes that IV has been conspicuously rising since the end of June. With broader economic data seemingly pointing to higher interest rates – and supposedly higher profitability for LendingTree – TREE stock could attract speculative interest.
Nevertheless, those who want to go the long side of this trade will want to exercise caution. First, the Barchart Technical Opinion indicator rates TREE stock a weak 8% sell. And while the underlying enterprise carries a moderate buy view among Wall Street analysts, here’s the deal. Because of TREE’s recent strong performances, its price stands at $25.70, above the mean target of $24.78.
Frankly, TREE stock might be too rich for most investors’ blood.
Fundamentals Don’t Favor LendingTree
Although higher interest rates offer higher profitability, as I said earlier, this framework depends on all other things being equal. Under the present juncture, though, the Fed can’t just raise rates without risking a possible economic downcycle, perhaps even a full-blown recession.
Should the central bank decide to get serious with historically high inflation, the positive profitability implications for LendingTree will likely quickly fade because of the hit to the workforce. In particular, the loss of technology-related jobs which tend to be higher paying in nature would likely negatively impact LendingTree’s business, particularly in the big-ticket items like home purchases.
Also, you got to look at the narrative practically. If higher interest rates were really positive for TREE stock, how come it didn’t jump higher throughout 2022 when the Fed aggressively hiked rates? Roughly speaking, TREE traded around $130 at the start of last year. By the end, it was around $21.
Finally, TREE stock may be a possible value trap. Yes, as Stocknews.com points out, TREE trades at 1.11X forward enterprise value (EV) to sales. It seems cheap compared to other lending/credit-related companies. However, any hit to the labor market would probably have an onerous effect on LendingTree’s business. Thus, conservative investors should stay away.
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.
