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Elliott Management Makes an Activist Move on AT&T (T)

Posted: 10 Sep 2019 03:00 AM PDT

Fund sees move to $60 per share by 2021.

Elliott Management sent a letter to the management of AT&T (T), stating that the company's shares were tremendously undervalued, and that certain strategic moves could be made to move the share price to $60 by the end of 2021, a 65 percent move higher.

The plan includes an increased strategic focus, improved operational efficiency, a formal capital allocation strategy, and enhanced leadership and oversight. Elliott amassed over $3.2 billion in shares before sending the letter.

Although shares of the company rose quickly, AT&T's management came out in the afternoon with a response that indicated a resistance to undertake the actions that Elliott sees shares sending higher.

AT&T is often criticized for its debt load, but the company has spent billions in the past few years to make acquisitions to move it away from legacy telecom operations and into a diversified media content and delivery service, including its acquisitions of Time Warner and DirecTV.

Action to take: While we like the potential upside over the long term, the company's rally year-to-date has pushed it to the higher end of its valuation, particularly if management resists any potential changes. Investors should look to buy shares under $34, with shares being a strong buy under $30.

Speculators may want to buy put options to bet on a decline as the activist campaign plays out, with potential downside sending shares down 10-15 percent. But short-traders beware, the company's high dividend yield looks attractive in today's low interest rate environment.

Unusual Options Activity: Hanesbrands (HBI)

Posted: 10 Sep 2019 03:00 AM PDT

Bet on double-digit drop in shares by February.

The January 2020 $16 put options on Hanesbrands (HBI) saw nearly 7,000 contracts trade, a 28-fold surge in volume over the prior open interest of 243.

With shares trading around $15, the option is particularly unusual in that it is an in-the-money bet on shares remaining under $16 between now and January 17th, 129 days away. With a cost of $2.10 per contract, nearly $1.00 of that is in-the-money.

In order for the option to make a profit by January, the company's shares will need to drop to at least $14. Should they drop to, say, $10, the $16 bet would be worth $6, a clean triple from here.

Action to take: The option is even more unusual given that Hanesbrands looks to be in good shape. Shares rallied over 6 percent on the day, and the company trades at less than 10 times earnings. With a 4.25 percent dividend yield, the consumer apparel company looks like a better long-term investment than a short-trade play. Shares are well below their 52-week high of $19.38, so there's more to run, and other apparel companies have been moving higher or seeing insider buys as well.

Consequently, the facts looks as though investors would be better off buying shares around $15.

Speculators should be buying the January $16 calls, not the $16 puts, to profit from what looks like a further upside in shares.

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Insider Activity: Granite Construction (GVA)

Posted: 10 Sep 2019 03:00 AM PDT

Senior VP buys nearly $100k in shares.

Kyle Larkin, a Senior Vice President at Granite Construction (GVA), picked up 3,500 shares of the company, increasing his stake by nearly 73 percent. The cost came to just under $100,000.

Insiders have been net buyers, and data shows that in the past year, corporate insiders have gone from owning 1.8 percent of the company to 2 percent, a small but important increase.

Granite Construction is in the business of infrastructure contracting and construction materials productions in the United States, with a focus on transportation, water, specialty, and materials segments. Shares are down 36 percent in the past year.

Action to take: While infrastructure companies can't seem to catch a break in today's market, the drop in shares and company's strength put it at a price just under 9 times forward earnings. The company's overall balance sheet is in a strong position without excessive debt, and shares offer investors a dividend of 1.8 percent right now, making it easy to see why insiders have been buying this year.

Shares look like an interesting long-term buy under $30, although with the company's beta of 1.5, shares will be far more volatile than the overall market.

Given the company's share price and the limited number of options trades, we have no recommendations for speculators at this time either long or short.

Snapchat Drops on Bank of America Outlook

Posted: 10 Sep 2019 03:00 AM PDT

Bank cites decline in app downloads this quarter.

Social media company Snapchat (SNAP) has more than tripled off its lows set last December. And shares are up nearly 20 percent in the past quarter, against a flat stock market at best. Yet analysts at Bank of America are sounding a warning that the rally may be about to end.

The bank cited the number of app downloads for the company, showing that there's an 18 percent drop compared to the company's second quarter numbers.

Social media companies use sector-specific metrics, such as time spent on the app, to determine their value. So while the declining number of downloads isn't the end of the world, it's a sign that subscriber growth, a key metric for the space, may be substantially off in the next quarter. Shares of the company fell more than 7 percent on the news.

Action to take: Snapchat has been a great performer year-to-date, making it a favorite play among options traders. Taking some profits off the table now makes the most sense. Speculators may want to bet on a downside, say with January 2020 $15 puts, but even with this news, shares could still push higher on bullish sentiment in the tech space, so trade cautiously there.

Investors who have been sitting on the sidelines should wait for a pullback to around $12 before buying here, given the relatively high valuation and strength of the recent rally.
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