As I write this before the markets open Friday, the S&P 500 futures are more than 1% higher on good news from the April jobs report.
The U.S. Department of Labor reported this morning that total nonfarm payroll employment rose by 175,000 last month, while the unemployment rate rose 0.1% to 3.9%, the third consecutive month between 3.8% and 3.9%.
Between March 2022 and July 2023, the Federal Reserve raised its benchmark rate 11 times. It’s now at the highest level since 2001. Inflation has stopped the Fed from starting to lower rates. Friday’s number could help move the Fed to act. As a result, the markets look to open in positive territory.
It’s Friday, so I’ll be discussing unusual options activity that caught my attention. As I scoured Thursday’s most unusually active stocks and ETFs, three securities have caught my attention—twoof the former and one of the latter.
Have an excellent weekend.
Upwork
Upwork (UPWK) had the second-highest Vol/OI ratio on Thursday at 58.46. Generally, when there isn’t a Vol/OI ratio over 100, it indicates mediocre options volume. Yesterday's total options volume was 39.4 million, considerably less than the 41.9 million daily average.
The option was the June 21 $12.50 call with a $1.10 ask price and a down payment of 8.8%. The shares will have to appreciate by 61 cents (4.7%) over the next seven weeks to consider exercising your right to buy 100 shares of the online recruiter,
According to the Barchart Technical Opinion, UPWK is a weak sell, so its work is cut out for it. I’ll get back to the call option in a moment.
Upwork reported Q1 2024 results on Wednesday. Its revenues were up 19% year-over-year to $191 million, while its earnings per share on an adjusted basis were $0.22, up from a one-cent loss a year earlier. The revenue exceeded analyst expectations by $5 million, while the EPS was three cents better than the consensus of $0.19.
Other good news in the quarter included a 5% increase in active clients to over 872,000, a significant turnaround in adjusted EBITDA—$33 million, up from a $2.9 million loss in Q1 2023—and positive free cash flow.
“We continue to accelerate profitability while investing in growth and innovation. Our comprehensive Upwork Updates launch reflects a huge slate of exciting new products—many of which are built on our innovative AI foundations—as well as extensive feature enhancements and partnerships across our work marketplace,” stated Upwork’s Q1 2024 press release.
Although Upwork’s shares are down more than 8% in 2024, they’re up 62% in the past year but down significantly from their all-time highs of around 60 in October 2021.
In 2024, it expects to generate revenue of $776 million and $0.90 EPS at the midpoint of its guidance. Its stock trades at 2.3x its sales and a reasonable 13.7x 2024 earnings.
The call has a delta of 0.64761, which means you can double your money by selling before expiry if its shares increase by $1.70 (13%) over the next 49 days. That will be tough, but it’s doable, given its solid results.
Peloton
Peloton (PTON) is only for risk-forward investors. Its business is in tatters, and the CEO has just stepped down. However, the Oct. 18 $5 call looks interesting if you're risk-tolerant. I’ll get back to the option after quickly discussing the dumpster fire that is Peloton.
On Thursday, the maker of stationary bikes and provider of fitness class streaming announced that it would cut 15% of its global workforce to save money. More importantly, its CEO, Barry McCarthy, who’s spent two years unsuccessfully trying to turn around the company’s fortunes, stepped down.
Its goal is to cut $200 million annually from its operating expenses by closing some of its retail showrooms and cutting 400 jobs.
“The objective of the cost reductions is to align our cost structure with the current size of our business and position Peloton to generate sustained and meaningful positive free cash flow,” Fortune reported the comments from Peloton’s statement announcing the cuts.
At the same time, it’s working with its banks to restructure its finances. As of March 31, it had $794.5 million in cash and short-term investments on its balance sheet, a total debt of $2.31 billion, and a net debt of $1.52 billion, or 87% of its market cap.
Cutting $200 million out of its costs is about 13% of its trailing 12-month operating expenses.
I’ve followed fitness equipment companies for many years. Call it a hobby. I’ve never seen a public company make money for a significant period. The business model always seems to break down due to the high cost of the equipment. Arnold Schwarzenegger can afford to have a $500,000 gym set up. Very few outside the 1% can.
However, options enable investors to make small bets on risky investments so you don’t lose your shirt.
The $5 call has an ask price of $0.37, which means it’s a down payment of 7.4% on 100 of its shares. Based on a delta of 0.34360, it has to increase by $1.08 (34%) to double your money selling the call before expiration and appreciate by 72% over the next 168 days if you want to exercise your right to buy 100 PTON shares.
If the company announces hiring a top-notch CEO over the summer and the next two quarters before expiration show some traction on the cost reductions, I could easily see its shares increasing by 30-40% by October.
The risk/reward proposition is tilted in your favor.
KraneShares CSI China Internet ETF
I won’t spend a lot of time on this last one.
The KraneShares CSI China Internet ETF (KWEB) bets on China’s economy recovering. More importantly, a recovering economy will bring more institutional money back into the markets.
However, that’s not a sure thing. The Financial Times recently wrote about President Xi Jinping’s reluctance to accelerate domestic consumption.
“The pressure on Beijing to find a new growth model is becoming acute, analysts say. China has become too big to rely on its trading partners to absorb its excess production,” wrote FT contributor Joe Leahy.
“‘The exit strategy has to be, at the end of the day, consumption — there’s no point producing all this stuff if no one’s going to buy it,’ says Michael Pettis, a senior fellow at the Carnegie Endowment in Beijing.”
So, it remains uncertain whether China’s economy will fully come to life in 2024.
The Oct. 18 $32 call, based on yesterday’s closing price of $30.17, was 6% out of the money. Add the $2.47 ask price, which jumps to 14%. It's possible to increase by more than 16% in the first four months of 2024.
Given its reasonable 7.7% down payment, it’s an inexpensive way to bet Xi will turn on the domestic growth engine by fall.
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.
