While contrarianism can sometimes lead to extraordinary gains, in other cases, it’s best to simply go with the crowd. However, a daring few market participants have placed bullish wagers on FedEx (FDX), a once-proud bellwether of consumer sentiment that finds itself deeply embattled. Nevertheless, the steep red ink apparently hasn’t discouraged some folks for taking the opposite side of the bearish implications, with FDX stock being bid up in the derivatives market.
First, let’s discuss key background details. According to the AP, “Wall Street closed out the stock market's worst week in three months with more losses Friday, as a stark warning from FedEx about rapidly worsening trends in the economy rattled already anxious investors.”
The news agency went on to state that FedEx “sank 21.4% for its biggest single-day sell-off on record after warning investors that profits for its fiscal first-quarter will likely fall short of forecasts because of a dropoff in business. The package delivery service is also shuttering storefronts and corporate offices and expects business conditions to further weaken.”
One of the main issues regarding the dour note for FDX stock is inflation. In August, the consumer price index climbed 8.3% on a year-over-year basis. While lower than the 8.5% rise in July, analysts anticipated that the benchmark inflation index would hit 8.1% last month.
This dynamic indicates that the Federal Reserve has its work cut out for it. Earlier, Fed chair Jerome Powell indicated that raising interest rates – which would cause some pain – was necessary to avoid long-term consequences for the economy. It now appears that the central bank must act more aggressively than intended, hurting FDX stock and other consumer sentiment-dependent names.
Nevertheless, FedEx garnered the spotlight for unusual options activity.
Bold Bets Place on FDX Stock
When the dust cleared on the Friday, Sept. 16 session, FDX stock curiously accumulated bullish interest among certain traders. Optimistic market participants piled into the $190 calls with an expiration date of Oct. 21, 2022. Volume reached 3,693 contracts against an open interest reading of 103.
Interestingly, but perhaps not surprisingly, the bid-ask spread as represented by the midpoint price ($1.08) came out to 14.8%. That’s significantly wide, indicating that the trade must be 14.8% up above the breakeven point to truly break even on a net basis. Usually, wide spreads indicate lower volume for the trade. As well, market makers often give themselves a safety margin for difficult-to-facilitate transactions.
Significantly, Barchart.com notes that the beta – or indication of volatility – for FDX stock stands at 1.21. Beta figures higher than 1 indicate higher-than-average volatility.
To be fair, FDX stock saw four entries in the unusual options activity segment last Friday. All except the aforementioned one above represented put options, or options that rise in value as the underlying security falls.
In addition, the contrarian traders are moving well against the predominant trend for FDX stock. At time of writing, FedEx’s put/call open interest ratio stood at 1.24. Usually, 0.70 is the delineation point between bullishness and bearishness. Figures higher than 0.70 – and especially higher than 1 – indicate pessimistic sentiment.
Finally, analysts appear to be losing patience with FDX stock. Three months ago, nine Wall Street experts rated shares as a strong buy while four rated them as a hold. In the current month, eight analysts peg FDX as a strong buy while 12 suggest that it’s a hold.
FedEx Depends Heavily on the Consumer Economy
While it’s not a great feeling to pile on top of an already reeling enterprise, investors need to exercise extreme caution taking the contrarian side of FDX stock. While market heroics can sometimes yield massive profitability, they can also yield substantial pain.
The main concern for FedEx moving forward is the viability of the consumer economy. Though e-commerce arguably kept the wheels turning during the worst of the COVID-19 crisis, nowadays, the narrative has faded. For instance, in the second quarter of 2020, e-commerce sales represented 16.4% of all retail sales. In Q2 2022, this metric slipped to 14.5%.
Worse yet, as inflation rises, people have less incentive to acquire goods via delivery services and will instead opt for brick-and-mortar alternatives (if conveniently available) to save on costs. Therefore, FedEx depends on a robust consumer economy. And the Fed can help matters by controlling inflation.
However, the central bank must also be careful in not overdoing its hawkish strategy. Otherwise, the broader economy could slip into recession, engineering a rough landing that the Fed is keen to avoid. It’s a delicate balance – and one that might not be addressed in time to save FDX stock from serious damage.
Read the Room
Probably the best approach for FedEx for most investors is to read the room. After going through their revenge spending burst, many consumers are simply tapped out. Factor in fundamental headwinds like inflation and now a stifling environment toward higher borrowing costs and FDX stock should be left to gamblers.
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