Ford’s Unusual Option Activity Says It’s a Buy

One way to follow the smart money is to scour 13F forms to see what billionaires and big money management firms are buying. Another possibility is to track the unusual options activity of stocks ready to make a big move. 

Each week, I like to look at the companies whose unusual options activity is screaming buy this stock. Whether you’re buying the company's underlying shares or a call option to buy some in the future, it all boils down to fundamentals. Some companies have them, and some don’t. 

On April 29, these three stocks attracted higher than normal investor interest in their options. All three also have excellent fundamentals. 

Alibaba (BABA)

The Chinese e-commerce giant got a bit of help from the Chinese government on April 29. It announced that it would provide a stimulus for its struggling economy to meet its 5.5% GDP growth estimate for 2022. 

Tech stocks were higher on the news. Both the CSI 300 and Shanghai Composite Indexes were up more than 2% on the day. As for Alibaba, it was up more than 10% through midday trading. The rally comes as a big relief to long-time shareholders. BABA is still down more than 57% over the past year as the Chinese regulators cracked down on large-cap tech companies and hybrid businesses such as Alibaba. 

As a result of the gains, Alibaba’s July 15 $85 calls on April 29 were trading for $20.53 a call contract. The contract volume on the day was 10,009, 10.9x the open interest. Currently trading around $100.50 a share, it’s got 77 days to move higher in the money. 

 The company’s 14-day RSI is 52.96. Anything below 30 is considered oversold, and anything above 70 is overbought. BABA is neither. It’s right in fair value.

On April 28, analysts cut Alibaba’s earnings estimates by 4%, the second straight month they’ve done so. Analysts still like BABA. Of the 56 covering its stock, 46 rates it a Buy or Overweight.   

Quanta Services (PWR)

Although the infrastructure solutions provider’s options aren’t exactly flying off the shelf --  I included it because it’s a business that ought to do well in the years ahead as utilities and other infrastructure-related companies update their assets. 

Its May 20 $130 calls were trading for $1.75 a call contract on April 29. The contract volume on the day was 1,001, 4.37x the open interest. Currently trading around $117.99 a share, it’s not too far off being in the money with 21 days left before the call contracts expire.  

At present, the company’s 14-day RSI is 35.53. That’s getting very close to oversold territory. Down almost 13% in the past month, the entry point to buy PWR appears to be upon us.

Quanta reports Q1 2022 results next week. The company’s guidance for revenue in 2022 is $16.25 billion at the midpoint of its projections. That’s 25.2% above its 2021 revenue of $12.98 billion. It expects midpoint adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $1.65 billion, 31.0% higher than a year earlier. 

Quanta finished the year with a backlog of $19.27 billion, 1.2x higher than its projected 2022 revenue. It’s going to be busy in 2022 and beyond. 

While its stock isn’t as cheap as it once was, you’re still buying growth at a reasonable price.

Ford (F)

Inflation and supply chain issues continue to dent Ford’s share price. Down 35% year-to-date, Ford stock hasn’t been this low since last October. Both Ford and General Motors (GM) think earnings growth can continue despite these issues. Analysts aren’t so sure.

Before reporting Q1 2022 earnings on  April 28, several analysts made moves to account for the challenging business environment. JPMorgan cut its first-quarter earnings for the second time to $0.41 a share, down from its previous guidance of $0.52. Ford’s earnings came in at 38 cents, three cents less than the JPMorgan estimate.

Ford can only outrun cost increases for so long. However, to be fair to the company, a big chunk of its earnings reduction had to do with its Rivian Automotive (RIVN) investment. Ford’s Rivian investment lost 52% of its value in Q1 2022, to $5.1 billion from $10.6 billion at the end of December. 

There is no question that Ford will have a tough time making big profits in the next few quarters. Due to part shortages, it and General Motors shut down production at some of its North American plants on April 28. 

If you’ve never owned Ford stock, consider this an opportunity to buy it while its share price is low. Once the supply chain issues go away, the F-150 Electric Lightning will fly out of the showrooms.

The May 27 $15 calls were traded on April 29 for $0.48 a call contract. The contract volume was 61,265, 20.75x the open interest. Currently trading around $14.26 a share, it’s 74 cents from being in the money with 28 days left in the call contract. At present, Ford’s 14-day RSI is 32.56. That’s almost into oversold territory.

The Bottom Line

While I like all three companies, I do believe that the Ford call provides the best opportunity in the near term to profit from these options. However, long term, owning both BABA and PWR make just as much sense as Ford. For me, it’s a toss-up.   

Happy Investing.