When thinking of high-flying, must-own assets in a roaring bull market, few would immediately turn their attention to Colgate-Palmolive (CL). Known for its everyday essentials, it’s more akin to the comforting background hum of a portfolio than its headline act.
Indeed, Colgate’s primary allure has always been its dependability. Everyone needs toothpaste. Many will reach for a Colgate product when doing their shopping, making it a staple in both households and many investment portfolios.
Further cementing its case, Colgate boasts a forward dividend yield of 2.60%. Admittedly, this yield isn't going to set the world alight, especially when the payout ratio sits at a somewhat elevated 55.60%. But let’s not overlook the company’s impressive track record of 61 years of consecutive dividend increases. That’s reliability by any measure.
Yet here lies the conundrum. In a bullish frenzy, when everyone seems enamored with the latest tech IPO or a groundbreaking innovation in a different sector, excessive bullishness on a stock like CL is a little... odd. It suggests that investors might be becoming wary of the broader market, retreating to the safety of stalwarts like Colgate as storm clouds gather on the horizon.
The recent surge in unusual options activity for CL only adds to this narrative. Large investors seem to be hedging, preparing for the possibility of increased volatility or perhaps a downturn. When too many eyes turn toward the traditional safe havens in an ostensibly booming market, it begs the question: What do the insiders know that the rest of us don't?
CL Stock Gets Love from the Institutions
When it comes to assessing investor sentiment in a particular stock, the unusual options activity is a goldmine. And recently, Colgate witnessed some eyebrow-raising trades.
After the close on Sept. 18, CL stock was at the epicenter of some intriguing market machinations. The stock found itself as the second-most unusual transaction based on a staggering increase in volume, a whopping 1,082.04% leap from the Monday session to its trailing one-month average.
But it's not just the sheer volume – a heady 51,348 contracts against an open interest of 93,493 – that's drawing attention. The composition of that volume tells a story. A mere 1,244 of those contracts were calls, while the remaining 50,104 were puts. At a glance, the resulting put/call volume ratio of 40.28 might come across as alarmingly bearish.
However, when diving deeper, the narrative shifts.
While options are often purchased for speculative reasons or protection, they can also be sold. And the distinction between buying and selling options can be profound. Using Fintel’s screener for options flow, we see evidence pointing to institutional involvement. All the significant transactions were for sold puts at a consistent strike price of $60, across various expiration dates.
Let's delve deeper. A particularly standout transaction involved the Jun 21 '24 $60 Put. Volume for this option spiked to 27,563 contracts, dwarfing the open interest of just 411. Another fascinating development was with the May 17 '24 $60 Put. Here, the volume stood at 21,700, with an open interest of zero, likely indicating fresh contracts.
But there’s another wrinkle. Typically, options traders look for high implied volatility (IV) to sell options, capitalizing on the higher premium. Yet, the IV for these specific options was relatively muted, sitting at 21.20% for the May '24 contract and 21.48% for the Jun '24 one.
This suggests an intriguing strategy. Perhaps these institutional traders anticipate a rise in CL stock. If the stock climbs, the puts they've sold might decrease in value. This scenario could then offer them an opportunity to buy back the puts at a profit, essentially squaring up their position before any significant rise in IV.
In the intricate game of options, one thing is clear: big players are making moves on CL, and the rest of the market would do well to take notice.
That’s Great for Colgate, But What About the Economy?
When it comes to the stock market, sometimes an upwards tick in a single equity can reveal more about the broader economic landscape than dozens of data points. Colgate-Palmolive is in the spotlight now, with rising optimism among institutional investors. But what does this concentrated confidence mean for the larger economic picture?
Breaking down the surge in CL stock, we see a potential shelter play by seasoned investors. Colgate, with its vast array of everyday essential products, provides an enticing safe haven amidst uncertain economic terrains. But such pronounced bullishness in a stock like CL could be a canary in the coal mine.
Several concerning indicators pop up. For starters, U.S. credit card debt has crossed the daunting threshold of $1 trillion. On the surface, it hints at consumer confidence; people spending because they believe they can pay back. But it's a precarious balance. One substantial economic jolt could push many households to the brink, causing a ripple effect through the entire economy.
Additionally, layoffs continue unabated. As job security becomes a mounting concern, consumer priorities shift. Spending increasingly veers towards essential goods over luxuries. This pivot could be a boon for a consumer staples giant like Colgate. But it also signals potential stagnation in sectors dependent on discretionary spending.
In sum, the narrative isn’t as simple as CL stock being a solid buy. It's more nuanced. While institutions might be betting big on Colgate, their actions could be cautionary flags for the health of the broader economy. In their love for this consumer stalwart, we might just find an undercurrent of concern for the economic path ahead.
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.
