Peloton (PTON) announced a partnership with Lululemon (LULU) on Thursday that could see the embattled fitness company regain some of its momentum in the weeks and months ahead.
There are two agreements between the two consumer discretionary companies. The first involves Lululemon distributing Peloton’s content to its Studio membership. The second sees Lululemon become Peloton’s athletic apparel partner.
It’s a win/win situation. LULU gets better content for its Studio members and another revenue stream for its apparel, while PTON gets to partner with one of the biggest success stories in apparel over the past decade.
Naturally, with Peloton’s share price in penny-stock territory, the news increased its share price. LULU stock barely moved. Investors feel it’s a much bigger deal for the former than the latter if you read between the lines.
On Fridays, I discuss unusual options activity in the market. Yesterday’s news got me thinking about consumer discretionary stocks.
Here are three I like and the options to buy or sell to make it happen.
Have a great weekend.
Camping World Holdings
The recreational vehicle (RV) dealer had one unusually active option on Thursday. Camping World Holdings (CWH) March 15/2024 call had a Vol/OI ratio of 370x yesterday, a $21 strike, and an ask price of $2.70.
That’s nearly a 13% down payment on 100 of the company’s shares. That’s pretty high. However, there are several factors in your favor.
First, there are 168 days to expiration or basically half a year. Secondly, the delta is 0.53316, which means its share price only has to rise by $1.27 for you to make 25% on your call by selling it early.
The downside to buying CWH stock is that we don’t know how long interest rates will remain high, which is a big downer for anyone looking to finance these expensive hotels-on-wheels.
In the company’s latest quarter, its sales were $1.9 billion, 12.4% lower than a year earlier, while its operating income was $132.7 million, 47.8% less than Q2 2022.
Although it’s never fun to see revenues and profits cratering, the CEO and the company’s largest shareholder, Marcus Lemonis, is using this time to grow its footprint. For the first six months of 2023, it acquired or signed letters of intent on 30 dealerships. And it plans to continue buying in this weaker-than-normal operating environment.
Since 2017, CWH has traded above $45 on three occasions -- December 2017, May 2021, and November 2021 -- it can return to those lofty prices.
However, there is no question this is a play for someone okay with a bit of risk.
Deckers Outdoor
A footwear company rarely has one brand with a billion dollars in sales. It's even rarer to have two of them. However, that’s precisely what you get when owning Deckers Outdoor (DECK).
Most investors have probably heard of the company’s Ugg boots. They’ve been a staple with younger kids for years. Hoka, the company’s sneaker brand, joins Ugg in the billion-dollar club. It went over the $1 billion mark in sales on a trailing 12-month basis in Q3 2023, which it reported in February.
In May, Deckers reported Q4 2023 and full-year results. Excluding currency, it increased sales by 18.4% in fiscal 2023 (March year-end) to $3.63 billion. Ugg’s sales were $1.93 billion (down 2.7%), while Hoka’s were $1.41 billion (58.5% higher).
Its direct-to-consumer channel, which includes its own stores and e-commerce websites, saw sales increase 20.8% over 2022 to $1.47 billion, or 40.5% overall. That’s 2oo basis points higher than a year ago.
Further down the income statement, its operating income was $652.8 million (18% operating margin), nearly 16% higher than a year ago. As a result, it finished the year with almost $1 billion in cash and cash equivalents and no debt.
I’m sure there will come a time when it stumbles. All great companies have those moments. However, the good ones don’t let it slow them down. I continue to expect it to surprise and delight shareholders.
As for the unusual options activity Thursday, I’m looking at the March 15/2024 $430 put. It had a bid price of $12.80. That’s an annualized yield of 5.4%. I’ll admit that’s not much in a higher interest rate environment. However, should its share price fall to $417.20 (strike minus bid premium), you will be glad they’re put to you.
Walmart
I won’t spend much time explaining why you should own Walmart (WMT) stock. You probably shouldn’t be investing if it isn’t clear why someone would want to own stock in the world’s largest retailer. I’m sure the Waltons, the world’s wealthiest family at $225 billion, could give you a reason or two.
Of the 30 analysts in Barchart.com’s data, 25 have a Moderate Buy or Strong Buy rating (4.53 out of 5) with a mean target price of $178.69, 11% higher than where it’s currently trading.
The Walmart option I’m looking at is the Jan. 16/2026 $240 call with a $3.20 ask price. On Thursday, the call’s volume was 105, 9.55x its open interest. I'll admit that the low volume is a bit of a turnoff, but what do you expect from an option with 840 days to expiration? That’s not where the action’s at.
However, you make a 1.3% down payment on 100 WMT shares. While $320 isn’t anything, it’s much less of an outlay than the $16,273 you’d have to pay to buy it today. This gives you time to see where WMT stock is headed.
Plus, with a delta of 0.22717, its shares only have to increase by $14.09 for you to double your money on the option. Based on its Thursday closing price of $162.73, that’s less than 9% over 27 months.
It’s a conservative play but a smart one nonetheless.
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.
