With rising property crime having become an unignorable dilemma, the fundamental narrative for security network ADT (ADT) practically sells itself. Further, the Wall Street Journal reported early last year that police departments have lost officers and have struggled to replace them. Again, investors seemingly couldn’t ask for a more relevant narrative regarding ADT stock.
Unfortunately for stakeholders, the opposite has been true. Since the beginning of this year, ADT stock plunged nearly 35%. In the past 365 days, it fell 22% below parity. And over the trailing 60-month period, ADT ended up losing almost 24% of equity value. Adding to the misery, rumblings in the derivatives market appear to favor the bears.
For conservative, risk-averse investors, ADT stock might not be worth the troubles. On the other end, those that can handle potential volatility may have a contrarian upside opportunity available. Below are two sides to this intriguing narrative.
More Than Enough Reasons to Question ADT Stock
Aside from the sharp losses that ADT stock incurred this year, the primary source of anxiety for the underlying security enterprise comes down to its lackluster financial performances.
In the first quarter of 2023, ADT posted adjusted earnings per share of 12 cents, missing Wall Street’s consensus target of 13 cents, according to Zacks Equity Research. To be fair, ADT suffered a loss of 1 cent per share in the year-ago quarter. However, in the last four quarters, the company only surpassed consensus EPS estimates two times.
On the top line, ADT rang up sales of $1.61 billion for the quarter ended March 31, 2023. This tally too fell short of the consensus target (by 0.76%). One year ago, ADT posted revenue of $1.55 billion. Unfortunately, over the past four quarters, the security specialist topped estimates only two times.
In addition, the lagging ADT stock cuts a sharp contrast to the benchmark S&P 500 index, which gained just under 10% since the start of this year. So, buying a basket of fairly boring blue-chip stocks would yield far better results than a seemingly relevant security enterprise.
Perhaps not surprisingly, then, ADT stock became an unfortunate highlight in Barchart’s screener for unusual stock options volume. Specifically, call volume hit 8,224 contracts against an open interest reading of 21,720. As well, the delta between the Friday session volume and the trailing one-month average metric came out to 475.51%.
Drilling down, call volume reached 2,666 contracts while put volume jumped ahead at 5,558 contracts. This pairing yielded a put/call volume ratio of 2.08, which again on paper favors the bears. Ordinarily, poor earnings results and pessimistically tilted options dynamics scream further downside ahead. Nevertheless, contrarians might have an enticing upside prospect here.
Rising Crime a Cynical Catalyst for ADT
Although the increase in criminality hasn’t quite produced the desired outcome for ADT stock – quite the opposite, really – investors may just need to exercise a bit more patience. A key reason why the security and smart home automation specialist may have struggled may be due to the unique circumstances associated with the Covid-19 pandemic.
Obviously, the biggest development that materialized during the pandemic when it comes to security-related issues centers on the work-from-home (WFH) pivot. Also, a lesser-appreciated narrative under this security paradigm is the skyrocketing sales of firearms during the worst of the health crisis.
It doesn’t take a rocket scientist to understand the implications for burglars and similar nefarious actors: constantly occupied homes with homeowners armed to the teeth don’t exactly represent easy targets. However, what would happen if WFH came to an end? In this scenario, homeowners would be more vulnerable. As well, great demand exists for firearms in the black market.
Put another way, if workers are recalled back to the office, this one dramatic shift may yield a spike in property crime. Through news cycles and word of mouth, people will start taking their security much more seriously, thus lifting ADT stock.
Of course, the above thesis depends on companies actually recalling their workers. However, the main catalyst that could push a full normalization of the workplace environment is that corporate leadership teams aren’t stupid.
Yes, you can find data that indicates remote workers are more productive. At the same time, sales of automated mouse movers to evade productivity trackers skyrocketed. As well, consumption of mature content increased sharply during the pandemic, according to research published by the National Library of Medicine.
It’s difficult to believe that all three things are true at the same time.
A Tough But Tempting Call
To be clear, most investors may want to follow the implication of the aforementioned options dynamic and avoid ADT stock. Simply, it hasn’t been getting it done in the charts nor on the financial statements. On the flipside, a possibility exists that ADT can turn the tables on the bears. Specifically, a coming paradigm shift in the workplace may tempt higher criminality. If so, the security specialist could be a smart idea.
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.
