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Hibbett, American Airlines, PG and Palantir as Zacks Bull and Bear of the Day
Read MoreHide Full Article
For Immediate Release
Chicago, IL – October 5, 2020 – Zacks Equity Research highlights Hibbett Sports (HIBB - Free Report) as the Bull of the Day and American Airlines (AAL - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Procter and Gamble (PG - Free Report) and Palantir PLTR.
Hibbett Sports is a Zacks Rank #1 (Strong Buy) with A’s for Growth and Value. There is a B for “Momentum” but I rarely use that metric… still just a hair off of having straight A’s. This is a sporting goods retailer and it has really survived the pandemic and maybe even pulled some sales forward. Let’s take a deeper look at this stock in this Bull of the Day article.
Earnings History
This is really a case of feast or famine. The most recent quarter was a blowout with the company reporting EPS of $2.95 when $1.75 was expected. That $1.20 difference is good for a 69% positive earnings surprise.
Prior to that there were two misses in a row. A miss of 12 and 11 cents translated into negative earnings surprises of 28% and 17%.
4 quarters ago we had the report that really skewed the average. The beat of 20 cents translated into a positive earnings surprise of 153%.
So 2 beats and 2 misses with the beats coming in much stronger than the misses.
Estimate Revisions
Following the most recent big beat, estimates have really moved higher. I see this quarter running from 33 cents to 41 cents.
Next quarter has bumped from 47 cents to 57 cents.
The full year numbers are up as well, with this year running to $4.34 from $2.92 and next year lifting from $2.53 to $3.13.
The idea of negative earnings growth is here, and I think a lot of this could be a “pull forward” of sales expectations. The pandemic has made a lot of people use the home as their home gym, so that has to be part of the pull forward for this year.
Valuation
So these numbers are amazing. A 8.7x forward earnings multiple is super low. 1.8x book is going to keep the value players happy… but look at the topline growth. I see 75% topline growth for a sporting goods retailer in the most recent quarter. That is just amazing. Add to that margins jumping from 1.6% to 5.4% and you have an EPS surge.
American Airlines(AAL - Free Report) is a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day today. I know what you are thinking... won't there be some stimulus soon that will help the airlines out? Won't that help push the stock price higher? Well I certainly hope so! And I hope that those in need get that stimulus as soon as possible.
This is the Bear of the Day, and really it is a chance for someone to realize the Zacks Rank is all about earnings estimate revisions and not a headline driven recommendation. I know from experience in wiring these over the last several years that a lot of people don't understand the Rank and what it does and if AAL is surging on Monday that I just look like an idiot.
How could a stock that is surging be the Bear of the Day?
Well the Bull and Bear are written the day before and if we truly knew which stocks would be up the most and down the most would we give that away for free? The articles are more about showing why a stock is a Zacks Rank #1 (Strong Buy) or in this case a Zacks Rank #5 (Strong Sell).
Earnings Misses
The last two quarters have been impacted by COVID, but Wall Street knew that was the case. Despite that the estimates were still too high with the March quarter coming in 49 cents below expectations for a 22% negative surprise.
The June quarter came in $1.07 below expectations for a 15% negative earnings surprise.
Earnings reports have a small impact on the Zacks Rank... but the real thing that moves the Rank are forward earnings estimates.
Estimates Fall For AAL
After the recent miss, numbers got worse and worse.
The current quarter saw a small improvement of 9 cents over the last 670 days, but next quarter saw a drop of 20 cents.
The Zacks Rank is most heavily influenced by the full year numbers and I see 2020 moving from a loss of $15 and change to a loss of $18 and now a loss of $19.03.
Next year has seen an increase in the expected loss, from $2.19 to $3.37.
Investors do not want to see losses increase.
Additional content:
SPACs and Direct Offerings Are Becoming More Common
Today’s “Know Your Options” isn’t actually specifically about options, but it’s about a concept that I hope will allow you to formulate more successful strategies for trading.
In general, the listed options that most traders are interested in are those that have an underlying asset that’s likely to move or is the subject of some significant uncertainty. Underlying and options prices that move are likely to produce substantial profits if your hypothesis is correct.
As an example, front month, at-the-money options in Procter and Gamble – the consumer products giant that rarely surprises investors – are currently trading at less than a 20% implied volatility. That’s even lower than the S&P 500 as a whole. Institutional investors use the options market to buy protection or create additional income in stocks like PG, but retail options speculators rarely pay those "boring" stocks much attention.
On the other hand, companies that are new to the public markets tend to move much more – and their options tend to trade at much higher implied volatilities. Lately, we’ve been seeing companies make their debuts on the public markets not only through traditional Initial Public Offerings, but also through Direct Offerings and mergers with Special Purpose Acquisition Companies.
The newly popular methods of bring a private company public can be less expensive and are almost always faster than a traditional IPO, but they also mean that investors don’t necessarily get the same volume and quality of information prior to trading. That uncertainty often brings volatility – creating more opportunities to make (and lose) money – but options traders should be aware of the differences.
The Traditional IPO
Over the past century, the most common way for a private company to become public and trade on the major US exchanges was through an Initial Public Offering - which involved disclosing internal financial data in a standardized form and engaging the services of one or more investment banking firms to underwrite the offering. Simply preparing the appropriate offering documents was often beyond the capabilities of many small companies who had previously concentrated all of their efforts on their own business.
Those underwriting firms made potential investors aware of the risks and potential of the soon-to-be-traded company. For a long time, that came in the form of a “road show” that involved brokers literally traveling the country and informing the salespeople who would be selling shares to the public to satisfy the requirement that they do their due-diligence before recommending an investment security to the public.
Based on the response from the road show, the underwriters gauged demand for the offering and set an initial trading price. In return for their efforts, the underwriters received either cash compensation, shares in the new company, or a combination of both.
Some popular IPOs have increased in value quickly, sometimes doubling in price (or more) on the first day of trading. Despite the positive press they receive, that tends to be the exception rather than the rule. It’s in the best interests of the company as well as the underwriters for the offering to be priced at a level that public investors find fair.
The IPO method of going public gives prospective investor the most complete view of the financials and performance of a soon-to-be-public company.
Special Purpose Acquisition Corporations
The SPAC is a company that goes through the traditional IPO process before it has any measurable business activities. That makes the filing and underwriting process very simple. There aren’t any financials and the business description is something like, “using the proceeds to acquire one or more unspecified businesses.” It won’t surprise you that the nickname for a SPAC in the financial services industry is a “blank check” company. The investors have effectively granted management carte blanche to buy whatever they like.
Why would investors do that?
Because the rewards can be quite significant. Until recently, the shareholders of the SPAC would routinely retain up to 20% equity in the entities they acquired. That’s more than double traditional IPO underwriting fees. (In the recent SPAC boom, the share retained by the acquisition company is falling due to competition for the most desirable acquisition targets.)
Why would a private company accept dilution of 20% instead of 5-10% for an IPO?
The “good” reason: Speed. Acquisition by and already-listed SPAC is a fast way for a private company to have shares traded on a major exchange. In the case of “hot” industries like internet sports gambling or electric vehicle startups, getting to market quickly to have shares purchased by retail investors could mean quick appreciation well in excess of the additional dilution.
The “bad” reason: Reduced oversight. The SPAC filing process is relatively simple. Once approved, the new entity is free to buy almost anything that the directors approve. This doesn’t mean that there’s anything illegal or unsavory about SPACs, but investors need to be aware that for at least the first few quarters, they’re going to have much less insight and transparency into companies that list via a SPAC acquisition than they would from other public companies.
For options traders, less certainty generally means more price volatility in the underlying – and higher implied vols in the options.
The Direct Offering
Finally, there’s the “direct offering” in which the owners of a private company sell a portion of their ownership interest to the public without the assistance of underwriters. Eliminating underwriting commissions and fees reduces the dilutive effect, but also means that the owners are the major beneficiaries of the sale proceeds, rather than the company itself.
In some ways, the direct offering is inherently fair because the market determines a fair price rather than an underwriting firm. It’s all supply-and-demand.
This week, shares of the secretive technology firm Palantir began trading via direct offering. Though the company has yet to turn a profit, it was one of the lost highly anticipated offerings of 2020 and investors pushed the share price up to a market cap of $22 billion during the first day of trading.
The most unique part of the Palantir deal is a provision that grants the company’s three founders a class of shares that gives them almost 50% of the voting power – in perpetuity! Even if they sell their shares, they keep the votes.
Should that be deal-breaker for investors? Not necessarily, but unconventional arrangements like that generally warrant extra scrutiny.
Options
So what does this all mean for options investors?
It means that traders should expect higher actual volatility and higher implied options volatility in the shares of companies that became public through non-conventional offerings and/or mergers.
There’s not much you can’t find out easily about Proctor and Gamble. The company’s finances are basically an open book and analyst projections tend to fall into a tight pattern – hence the low implied vols.
When there’s more significant uncertainty and the possibility of unpredictable events on the horizon, you should expect higher vols.
It doesn’t mean you shouldn’t trade these hot new companies. After all, movement in the underlying tends to be where big money is made in options. Conversely, big options premiums are where big income gets collected by option sellers when the underlying moves less than expected.
To get your piece of the action, you definitely need to understand the nature of the underlying securities of the options you trade. Newly fashionable offering methods make that a bit more difficult – but also presents an opportunity to profit from traders who don’t bother to figure it out.
-Dave
Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.
Interested in strategies with profit potential even in declining markets? Maybe our Short List Trader service is for you.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
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Hibbett, American Airlines, PG and Palantir as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – October 5, 2020 – Zacks Equity Research highlights Hibbett Sports (HIBB - Free Report) as the Bull of the Day and American Airlines (AAL - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Procter and Gamble (PG - Free Report) and Palantir PLTR.
Here is a synopsis of all four stocks:
Bull of the Day:
Hibbett Sports is a Zacks Rank #1 (Strong Buy) with A’s for Growth and Value. There is a B for “Momentum” but I rarely use that metric… still just a hair off of having straight A’s. This is a sporting goods retailer and it has really survived the pandemic and maybe even pulled some sales forward. Let’s take a deeper look at this stock in this Bull of the Day article.
Earnings History
This is really a case of feast or famine. The most recent quarter was a blowout with the company reporting EPS of $2.95 when $1.75 was expected. That $1.20 difference is good for a 69% positive earnings surprise.
Prior to that there were two misses in a row. A miss of 12 and 11 cents translated into negative earnings surprises of 28% and 17%.
4 quarters ago we had the report that really skewed the average. The beat of 20 cents translated into a positive earnings surprise of 153%.
So 2 beats and 2 misses with the beats coming in much stronger than the misses.
Estimate Revisions
Following the most recent big beat, estimates have really moved higher. I see this quarter running from 33 cents to 41 cents.
Next quarter has bumped from 47 cents to 57 cents.
The full year numbers are up as well, with this year running to $4.34 from $2.92 and next year lifting from $2.53 to $3.13.
The idea of negative earnings growth is here, and I think a lot of this could be a “pull forward” of sales expectations. The pandemic has made a lot of people use the home as their home gym, so that has to be part of the pull forward for this year.
Valuation
So these numbers are amazing. A 8.7x forward earnings multiple is super low. 1.8x book is going to keep the value players happy… but look at the topline growth. I see 75% topline growth for a sporting goods retailer in the most recent quarter. That is just amazing. Add to that margins jumping from 1.6% to 5.4% and you have an EPS surge.
Bear of the Day:
American Airlines(AAL - Free Report) is a Zacks Rank #5 (Strong Sell) and it is the Bear of the Day today. I know what you are thinking... won't there be some stimulus soon that will help the airlines out? Won't that help push the stock price higher? Well I certainly hope so! And I hope that those in need get that stimulus as soon as possible.
This is the Bear of the Day, and really it is a chance for someone to realize the Zacks Rank is all about earnings estimate revisions and not a headline driven recommendation. I know from experience in wiring these over the last several years that a lot of people don't understand the Rank and what it does and if AAL is surging on Monday that I just look like an idiot.
How could a stock that is surging be the Bear of the Day?
Well the Bull and Bear are written the day before and if we truly knew which stocks would be up the most and down the most would we give that away for free? The articles are more about showing why a stock is a Zacks Rank #1 (Strong Buy) or in this case a Zacks Rank #5 (Strong Sell).
Earnings Misses
The last two quarters have been impacted by COVID, but Wall Street knew that was the case. Despite that the estimates were still too high with the March quarter coming in 49 cents below expectations for a 22% negative surprise.
The June quarter came in $1.07 below expectations for a 15% negative earnings surprise.
Earnings reports have a small impact on the Zacks Rank... but the real thing that moves the Rank are forward earnings estimates.
Estimates Fall For AAL
After the recent miss, numbers got worse and worse.
The current quarter saw a small improvement of 9 cents over the last 670 days, but next quarter saw a drop of 20 cents.
The Zacks Rank is most heavily influenced by the full year numbers and I see 2020 moving from a loss of $15 and change to a loss of $18 and now a loss of $19.03.
Next year has seen an increase in the expected loss, from $2.19 to $3.37.
Investors do not want to see losses increase.
Additional content:
SPACs and Direct Offerings Are Becoming More Common
Today’s “Know Your Options” isn’t actually specifically about options, but it’s about a concept that I hope will allow you to formulate more successful strategies for trading.
In general, the listed options that most traders are interested in are those that have an underlying asset that’s likely to move or is the subject of some significant uncertainty. Underlying and options prices that move are likely to produce substantial profits if your hypothesis is correct.
As an example, front month, at-the-money options in Procter and Gamble – the consumer products giant that rarely surprises investors – are currently trading at less than a 20% implied volatility. That’s even lower than the S&P 500 as a whole. Institutional investors use the options market to buy protection or create additional income in stocks like PG, but retail options speculators rarely pay those "boring" stocks much attention.
On the other hand, companies that are new to the public markets tend to move much more – and their options tend to trade at much higher implied volatilities. Lately, we’ve been seeing companies make their debuts on the public markets not only through traditional Initial Public Offerings, but also through Direct Offerings and mergers with Special Purpose Acquisition Companies.
The newly popular methods of bring a private company public can be less expensive and are almost always faster than a traditional IPO, but they also mean that investors don’t necessarily get the same volume and quality of information prior to trading. That uncertainty often brings volatility – creating more opportunities to make (and lose) money – but options traders should be aware of the differences.
The Traditional IPO
Over the past century, the most common way for a private company to become public and trade on the major US exchanges was through an Initial Public Offering - which involved disclosing internal financial data in a standardized form and engaging the services of one or more investment banking firms to underwrite the offering. Simply preparing the appropriate offering documents was often beyond the capabilities of many small companies who had previously concentrated all of their efforts on their own business.
Those underwriting firms made potential investors aware of the risks and potential of the soon-to-be-traded company. For a long time, that came in the form of a “road show” that involved brokers literally traveling the country and informing the salespeople who would be selling shares to the public to satisfy the requirement that they do their due-diligence before recommending an investment security to the public.
Based on the response from the road show, the underwriters gauged demand for the offering and set an initial trading price. In return for their efforts, the underwriters received either cash compensation, shares in the new company, or a combination of both.
Some popular IPOs have increased in value quickly, sometimes doubling in price (or more) on the first day of trading. Despite the positive press they receive, that tends to be the exception rather than the rule. It’s in the best interests of the company as well as the underwriters for the offering to be priced at a level that public investors find fair.
The IPO method of going public gives prospective investor the most complete view of the financials and performance of a soon-to-be-public company.
Special Purpose Acquisition Corporations
The SPAC is a company that goes through the traditional IPO process before it has any measurable business activities. That makes the filing and underwriting process very simple. There aren’t any financials and the business description is something like, “using the proceeds to acquire one or more unspecified businesses.” It won’t surprise you that the nickname for a SPAC in the financial services industry is a “blank check” company. The investors have effectively granted management carte blanche to buy whatever they like.
Why would investors do that?
Because the rewards can be quite significant. Until recently, the shareholders of the SPAC would routinely retain up to 20% equity in the entities they acquired. That’s more than double traditional IPO underwriting fees. (In the recent SPAC boom, the share retained by the acquisition company is falling due to competition for the most desirable acquisition targets.)
Why would a private company accept dilution of 20% instead of 5-10% for an IPO?
The “good” reason: Speed. Acquisition by and already-listed SPAC is a fast way for a private company to have shares traded on a major exchange. In the case of “hot” industries like internet sports gambling or electric vehicle startups, getting to market quickly to have shares purchased by retail investors could mean quick appreciation well in excess of the additional dilution.
The “bad” reason: Reduced oversight. The SPAC filing process is relatively simple. Once approved, the new entity is free to buy almost anything that the directors approve. This doesn’t mean that there’s anything illegal or unsavory about SPACs, but investors need to be aware that for at least the first few quarters, they’re going to have much less insight and transparency into companies that list via a SPAC acquisition than they would from other public companies.
For options traders, less certainty generally means more price volatility in the underlying – and higher implied vols in the options.
The Direct Offering
Finally, there’s the “direct offering” in which the owners of a private company sell a portion of their ownership interest to the public without the assistance of underwriters. Eliminating underwriting commissions and fees reduces the dilutive effect, but also means that the owners are the major beneficiaries of the sale proceeds, rather than the company itself.
In some ways, the direct offering is inherently fair because the market determines a fair price rather than an underwriting firm. It’s all supply-and-demand.
This week, shares of the secretive technology firm Palantir began trading via direct offering. Though the company has yet to turn a profit, it was one of the lost highly anticipated offerings of 2020 and investors pushed the share price up to a market cap of $22 billion during the first day of trading.
The most unique part of the Palantir deal is a provision that grants the company’s three founders a class of shares that gives them almost 50% of the voting power – in perpetuity! Even if they sell their shares, they keep the votes.
Should that be deal-breaker for investors? Not necessarily, but unconventional arrangements like that generally warrant extra scrutiny.
Options
So what does this all mean for options investors?
It means that traders should expect higher actual volatility and higher implied options volatility in the shares of companies that became public through non-conventional offerings and/or mergers.
There’s not much you can’t find out easily about Proctor and Gamble. The company’s finances are basically an open book and analyst projections tend to fall into a tight pattern – hence the low implied vols.
When there’s more significant uncertainty and the possibility of unpredictable events on the horizon, you should expect higher vols.
It doesn’t mean you shouldn’t trade these hot new companies. After all, movement in the underlying tends to be where big money is made in options. Conversely, big options premiums are where big income gets collected by option sellers when the underlying moves less than expected.
To get your piece of the action, you definitely need to understand the nature of the underlying securities of the options you trade. Newly fashionable offering methods make that a bit more difficult – but also presents an opportunity to profit from traders who don’t bother to figure it out.
-Dave
Want to apply this winning option strategy and others to your trading? Then be sure to check out our Zacks Options Trader service.
Interested in strategies with profit potential even in declining markets? Maybe our Short List Trader service is for you.
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Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit http://www.zacks.com/performancefor information about the performance numbers displayed in this press release.