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Option Traders Looking Bullishly at this ‘Draft’ Prospect

Posted: 13 May 2020 04:30 AM PDT

DraftKings Inc (DKNG) is a fantasy sports company that became public following its $3.3 billion merger with Diamond Eagle, a special-purpose acquisition company. The new company began trading on April 24, 2020 under the name DraftKings and under the symbol DKNG. The path to being publicly traded occurred without the fanfare of your usual IPO, but the performance since trading began has been anything but incredible. Even George Soros couldn't stay away from the opportunity to invest $66 million in the company in the deal that took it public.

With a stock like this, it can be hard to understand the potential for movement when there's no real trading history to draw from. Luckily, the option market does make constant assessments as to the potential movement in a company.

On Tuesday, the call volume was nearly 5 times the average with over 130,000 calls traded. Over 35% of the volume occurred at the ask price and 38% occurred between the market. The activity largely centered on the 15 MAY 20 $30 call option with over 70,000 contracts traded. Most of the activity was on the buy side with a fill price between $0.50 to just over $1.60.

Action to Take: In this circumstance, option traders have a breakeven of over $31 by the end of the week that came in to buy the $30 strike price. The near-term target by the end of the week is $30.

DKNG announces earnings on Friday before the market opens. Option traders that are willing to bet on the direction of the price over earnings or play a run up in the price into the earnings, may want to consider the 15 MAY 20 25/30 long call vertical for around $1.70. the max gain of $3.30 or 194% ROR is achieved if the price closes above $30 at the end of the week. Consider closing before the earnings for $3.00 or more.

As this Company Tests Their COVID-19 Treatment, Insiders Hit the Sell Button

Posted: 13 May 2020 04:30 AM PDT

Regeneron Pharmaceuticals, Inc (REGN) is a biopharmaceutical company that develops medicines for the treatment of serious medical conditions. One the company's treatments that looked promising early on was Kevzara. The drug was being tested alongside Sanofi (SNY), but early results of their IL-6 inhibitor hit hurdles in the U.S. following results, and the companies have scaled back a late-stage trial of critical patients.

That announcement came at the end of April. Since that time, the price of the stock has been stuck as it has not been able to break above the $575 resistance, despite the stock gapping higher on an earnings beat.

Since May 1, REGN has seen some of the highest insider selling of any large cap stock over $10 billion. Insiders have sold 119,039 shares at a value of $66.5 million. That Is fourth highest on the list. The selling was spread over 8 different transactions and included the EVP of research, directors and EVP & General Manager. The most aggressive selling was from the EVP and General Manager Daniel Van Plew, who sold 39,583 of his 69,395 shares.

Action to Take: Shorting a biotech stock in the middle of a pandemic is always a sketchy proposal. This is where options can provide limited risk to capitalize on a downside move.

An option play to consider is the 21 AUG 20 500/470 long put vertical for around $6.00. The max gain of $24 or 400% ROR is achieved if the price closes below $470 by expiration. Consider closing early for $18 or more.

4 Large Caps with Big Time Balance Sheets

Posted: 13 May 2020 04:30 AM PDT

As you look at the universe of publicly traded stocks, it's pretty big and almost overwhelming. As you start to add fairly basic criteria, the list dwindles significantly.

For example (according to gurufocus.com), there are 829 companies with a market capitalization of $20 billion or more. If you include only non-OTC stocks, the universe narrows to 397. That's a pretty manageable list.

Even at 397, they're still not created equal, and especially not in this environment. If you star to consider balance sheet metrics, the list gets small really quick. Out of the 397 companies that came up on the list, adding a cash-to-debt (C/D) ratio of greater 2 limits the list to only 50 companies. That metric adds a company's cash, cash equivalents and marketable securities and divides it by the company's debt.

If you consider debt-to-equity (D/E) of less than 0.50, it leaves you with 43 companies. Adding in a price-to-sales (P/S) value of 10 or below, the list narrows to 29. Finally, adding in a current ratio (CR) of greater than 2 leaves you with only 13 companies and 12 if you don't count Alphabet Inc twice.

Adding any traditional metric for valuation left you wanting. For example, a classic metric for price-to-sales, from a value investor perspective, would be less than 2. There currently are not any companies that meet that criteria, while including the other criteria on the list. In fact, there are only 144 companies with a P/S ratio less than 2 with a market cap of over $20B and isn't an OTC stock. When people talk about a once-in-a -lifetime opportunity to buy this market, they certainly aren't considering valuation.

The following list of four companies are ranked based on the following metrics listed in order of weight: C/D, D/E, P/S, and CR.

Big Time Balance Sheet Stock #1: Monster Beverage Corp (MNST)

Monster recently announced their earnings and they beat analyst EPS estimates by over 12% and revenues came in a little below analyst estimates. One of the takeaways from the report has to be that the company has seen little damage to its earnings as a result of the closures that are happening across the world.

Monster currently has no debt and has a current ratio of 3.5. they are trading at a P/S ratio of 8.45. The near-term target for MNST is $70.50

Big Time Balance Sheet Stock #2: Incyte Corp (INCY)

Incyte announced their quarterly results as well. They produced revenues that were higher than analyst estimates, but the EPS numbers came in below estimates. The company is expected to produce strong organic growth with current revenue projections for 2020 and 2021 at 12.7% and 18.1% respectively.

Incyte currently has a C/D ratio of 21.56 and a D/E ratio of 0.03. They have a current ratio of 3.41 and a P/S ratio of 9.56. The near-term target of INCY is $130.

Big Time Balance Sheet Stock #3: ZTO Express Inc (ZTO)

ZTO has earnings coming up on May 20 after the market closes. Analysts are currently expecting adjusted earnings to come in for Q1 at $0.16, which is a decline of 5.90% from last year. The full-year guidance is for $1.05, which is 9.4% higher than last year.

ZTO currently has a C/D ratio of 20.4 and a D/E ratio of 0.02. They have a current ratio of 3.01 and a P/S ratio of 8.09. The near-term target of ZTO is $37.

Big Time Balance Sheet Stock #4: T. Rowe Price Group Inc (TROW)

TROW recently announced earnings that surpassed analyst estimates on the top and bottom line for revenues and EPS. Current estimates for Q2 and for the current year have declined sharply in the last 60 days with expectations of an 18.7% decline and -12.9 % decline, respectively. The company currently pays a 3.2% dividend yield.

TROW currently has a C/D ratio of 9.05 and a D/E ratio of 0.03. They have a current ratio of 8.36 and a P/S ratio of 4.8. This company boasts the best current ratio and valuation of the group, but with the weakest earnings picture. The near-term target of TROW is $135.
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