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Bank of America Upgrades Philip Morris International (PM)

Posted: 02 Oct 2019 03:00 AM PDT

Valuation, current dividend yield make shares a buy.

Bank of America upgraded shares of Philip Morris International (PM) to a buy from neutral. The bank also reiterated an existing price target of $96, 23 percent higher than where shares currently trade.

The upgrade comes as fears that the tobacco industry in the United States will have more oversight and regulation following a series of illnesses related to vaping products. However, Philip Morris has little exposure to the U.S. market.

Further, the end of merger talks with Altria (MO), which was weighing on Philip Morris shares, is likely to cause a move higher. With shares down double-digits in the past few months, and 7 percent in the past year, the low price on the highly profitable company has pushed the dividend yield north of 6 percent.

Shares traded at 14 times earnings, and has grown earnings at 5.5 percent in the past year amidst the vaping headwinds that have weighed on the sector.

Action to take: On a valuation basis, shares look reasonable up to $80, where investors can buy at an historically high dividend yield for the company.

As shares have yet to move back to their pre-merger talk highs, however, it's unlikely that shares will move higher quickly, meaning that options traders may want to look elsewhere for a fast trade, such as one of the pot stocks instead.

 

Evercore Upgrades Spotify (SPOT)

Posted: 02 Oct 2019 03:00 AM PDT

Bearish view changes after stock correction.

Spotify (SPOT) was recently upgraded by Evercore, from underperform to in-line, with a price target of $110. Evercore had previously downgraded the company when shares were near $150, citing valuation and the market's optimistic view on the company's margin improvement.

With shares of Spotify currently around $113, the upgrade still indicates a slight overvaluation in shares. Currently, 21 analysts rank the stock as a buy, 10 as a hold (in-line), and 1 at a sell.

Shares of the music streaming service have fallen 37 percent in the past year, as the company has lost $7 per share in that time, with no turn to profitability in sight, despite the 200 million subscribers to the service.

Action to take: With shares only trading as low as $103 in the past year, there may not be further downside unless the company breaks to new lows. The upgrade essentially tells investors who may be out of shares or short to stay neutral, and given the company's current operations, that looks like the best bet here.

Options traders betting that the current downtrend will continue may want to consider the April 2020 $100 puts, which should move higher as share prices move lower. Tech-related companies, profitable or not, are often susceptible to the largest percentage drops in a market pullback.

 

Unusual Options Activity: Teva Pharmaceutical (TEVA)

Posted: 02 Oct 2019 03:00 AM PDT

November put buying suggests further drop.

The November 15th $8 put options on Teva Pharmaceutical (TEVA) saw over 17,000 contracts trade against a prior open interest of 243, indicating a 70-fold surge in volume on the trade.

With shares of Teva around $7, the $8 puts are already $1 in-the-money and should move penny-for-penny with any further drop in shares. At a cost of $1.44, the option also has about a penny a day in time premium attached to it.

Shares of Teva have slid by 68 percent in the past year, and the company has some liability stemming from opioid-related pharmaceutical products.

Action to take: We see further weakness in shares, both due to the company's poor fundamentals right now and the uncertainty over opioid lawsuits among others. While most of the drop is already priced in, shares are likely to trend down before moving higher. Investors should look elsewhere in the healthcare and pharma space right now and avoid anything with a tie to opioids.

Speculators may want to join in on this short-term bet for a further drop. As Teva next reports earnings in late November after the option expires, however, a put option going out to January, like the January 2020 $6 puts, may provide a better opportunity to continue riding shares down.

 

Insider Activity: Ulta Beauty (ULTA)

Posted: 02 Oct 2019 03:00 AM PDT

Director makes $59 million buy.

Charles Heilbronn picked up 243,849 shares of Ulta Beauty (ULTA), increasing his stake by 13 percent to just over 2,087,000 shares. The total cost for the latest purchase, with shares around $240, came to $58,900,000.

This marks the second insider buy at the company this year, following a 1,300 shares buy from the CEO in late September. Insiders have otherwise been sellers of the company, at prices 21 to 26 percent higher than the current price.

Although shares have rallied in recent weeks, shares of Ulta Beauty are still down 11 percent in the past year, underperforming the market, despite growing revenue by low-double digits. The beauty retailer operates over 1,200 physical locations and also sells products online.

Action to take: Shares look attractive up to $265. Although cosmetic and other beauty product sales can be somewhat cyclical, the company has performed well operationally and has a strong balance sheet with very little debt relative to assets. That's the kind of company in an industry worth holding during periods of uncertain times, and explains why insiders at other companies in the industry are buying as well.

Speculators may want to look at the March 2020 $300 calls, to bet on a further rally in shares in the next few months, but at around $15.00 or $1,500 per contract, it's a pricey bet and there may be other opportunities in the cosmetic space that require less capital up front.

 
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