Here’s the One Idea From the Unusual Options Activity Screener to Buy

After a disappointing session on Wednesday stunting a recovery effort in the S&P 500, the benchmark index finds itself down 23% for the year. On the other hand, Vale (VALE) – a Brazilian firm in the historically volatile metals and mining sector – lost only 2.6% during the same frame. Over time, VALE stock should rise higher based on powerful relevancies, with bullish traders making their intentions known in the options market.

On surface level, the narrative for the mining specialist seems risky. Fundamentally, commodity pricing aligns with broader macroeconomic trends. While inflationary forces natively support valuations for hard assets, the Federal Reserve expressed significant concerns about skyrocketing prices. In an effort to tame inflation, the central bank recently raised the benchmark interest rate. Based on the hot September jobs report, the Fed has zero motivations to mitigate its hawkish pivot.

Moving forward, then, the logical implication is that commodity pricing will decline as deflationary forces unwind prior monetary excesses. However, the Fed isn’t the only market influencer. With OPEC+ recently making the decision to cut crude oil production by two million barrels per day, hydrocarbon energy prices will likely rise. Since electric vehicles remain prohibitively expensive – nearly an average price of $63,000 for a new EV – most consumers still depend on combustion-based cars.

To help shift the mobility discussion to EVs decisively, production for these vehicles must increase markedly. And that’s where VALE stock could enter the picture. Undergirding the security is nickel production. Per its public profile, Vale is the world’s largest producer of nickel. Enticingly, the metal represents a key component of EV batteries.

Traders understand the downwind implications, thus sparking interest in the options arena.

VALE Stock Draws Positive Attention

Following the conclusion of the Oct. 19 session, VALE stock represented one of the highlights in Barchart.com’s screener for unusual options activity. Specifically, traders mainly targeted the $14.50 calls with an expiration date of Nov. 4, 2022. Volume reached 44,417 contracts against an open interest reading of 532.

Moreover, the bid-ask spread as represented by the midpoint price (28 cents) came out to 10.71%. That’s a wide margin, which usually reflects a lack of liquidity. As well, market makers give themselves extra leeway for transactions that are difficult to place.

For the record, VALE stock closed at $13.45 in the open market. That means shares must move up 7.8% for the trade to be at the money. While doable, the 15 days to expiration since the placement of the order reflects an aggressive character.

Despite the relevance of the underlying business, the bullish action on VALE stock presently contrasts with the predominant trend in the options market. Per data from Barchart.com, Vale’s put/call open-interest ratio stands at 0.77. Typically, 0.70 represents the delineation between bullish and bearish sentiment, with figures higher than this threshold indicating that more traders are buying puts than calls.

That said, covering analysts are steadily warming to the opportunity in VALE stock. Three months ago, Wall Street had an average consensus rating of “moderate buy” for the company, with one analyst rating VALE a “strong sell.” While the overall rating in the current month remains the same, no one pegs VALE as a sell anymore.

A Stout Investment

Another factor to consider regarding the mining company is its financial resilience. Anchored by decent strengths in the balance sheet, Vale really comes alive in the income statement.

For instance, Vale’s three-year revenue growth rate (on a per-share basis) stands at 30.9%. This stat ranks well above the median of 5.75% for the metals and mining industry. In addition, the company’s three-year free cash flow growth rate is 50.5%, ranking better than nearly 92% of the competition.

On the bottom line, Vale features a net margin of 42.2%. In sharp contrast, the industry median is only 3.53%. Better yet, the company’s return on equity – how much net income is generated per dollar of invested capital – stands at a lofty 55.2%. Not only is this stat ranked better than 98% of its peers, the datapoint also suggests that Vale is a high-quality business.

If that wasn’t enough to consider VALE stock as a long-term speculative buy, the underlying business features a price-earnings ratio of 3.3 times. Its forward PE is less than 5 times. For context, the mining industry’s median PE is 10.3 times while the median for forward PE is 9.3 times.

You’re not going to find too many fundamentally relevant opportunities at this much of a discount and with such strong financials. Plus, Vale provides a 4.40% forward yield with a payout ratio of 22.8%. If you’re in the market for a viable idea with several years of growth ahead, you should initiate your due diligence on VALE stock.

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