Friday's market sentiment was driven by extreme greed with Fear & Greed Index at 89, which had increased from the previous closing of 86. As reported by CBOE, the total put/call ratio for Friday was 0.75. The index put/call ratio was 0.77, and the equity put/call ratio was 0.54. The CBOE volatility index (VIX) put/call ratio was 0.38. In the following, top stocks had been identified through our daily options scanning process, with the scanning criteria where the daily call volume ratio was above 2.00 (2x of the average call volume) with a call volume above 10,000.
Average Call Volume
Daily Volume Ratio
Pfizer Inc. (PFE)
The Coca-Cola Company (KO)
Source: Schaeffer's Research
Unusual option activities can be an indicator or precursor of a major movement for the underlying stock. This article will try to identify the bullish factors for Pfizer Inc. and The Coca-Cola Company.
Pfizer Inc. is the world's largest pharmaceutical firm, with annual sales near $70 billion. PFE closed at $26.54 with 1.08% loss on Friday. The volume of 54.79M was 81.18% more than 30 day average of 30.24M. PFE had been trading in the range of $20.75-$26.96 in the past 52 weeks. PFE has a beta of 0.68.
6 Bullish Factors
- PFE enjoys a wide economic moat around its business with its solid foundation based on strong cash flows generated from a portfolio of diversified patent-protected drugs.
- PFE's board of directors had authorized a new $10 billion share repurchase program to be utilized over time, upon the sale of its nutrition business to Nestle. The new program is in addition to the $4.1 billion authorization remaining under the current share repurchase program.
- Positive drug development. The European Medicines Agency, EMA, issued a positive opinion about the conditional marketing authorization of its cancer drug bosutinib in the European Union for the treatment of adult patients with certain types of leukemia. Bosutinib is an oral, once-daily, kinase inhibitor, which limits cancer cell growth by inhibiting certain signaling pathways. European Commission also had approved expanding the use of the Company's pneumococcal conjugate vaccine, Prevenar 13, to older children and adolescents aged 6 to 17 years for active immunization for the prevention of invasive disease, pneumonia and acute otitis media caused by vaccine-type Streptococcus pneumoniae.
- IPO spin-off. Zoetis Inc., PFE's animal-health unit, plans to sell 86.1 million shares at between $22 and $25 each in IPO, valuing the company at around $12.5 billion.
- Fundamentally, PFE has a total cash of $22.98. PFE has a strong cash flow with an operating cash flow of $17.06B with a levered free cash flow of $16.25B, which is sufficient for PFE to distribute dividend (67% payout ratio) while continue to expand its pipeline. PFE has higher revenue growth (3 year average) of 11.8, comparing to the industry average of 6.9. PFE has a higher operating margin of 26.5%, ttm, comparing to the average of 22.3%, ttm. PFE, however, has lower net margin of 15.6%, ttm, as compared to the average of 16.4%, ttm.
- Technically, PFE is bullish with the MACD (12, 26, 9) showing a bullish trend and RSI (14) indicating a bullish momentum. PFE had been trading above its 50-day MA of $25.24.
Patent loss. In November, 2011, PFE lost its patent in the United States for Lipitor, whose sales topped $10 billion a year. Pfizer plans to cut about 20% of its sales force for primary care drugs due to Lipitor's patent loss.
Valuation on the higher end. PFE's P/E of 20.9 is higher than the industry average of 16.9 and PFE's 5 year average of 17.2.
Jefferies analysts increased the price target of PFE to $31 with a "Buy" rating.
Analysts, on average, are expecting an EPS of $0.44 with revenue of $14.40B for the current quarter ending in December, 2012. For full 2012, analysts are expecting an EPS of $2.16 with revenue of $58.38B. PFE is expected to release the Q4, 2012 earnings on January 29, 2013 before the market opens.
The most active call was Feb. 15, 2013 call at the strike price of $27.00 with a volume of 4,247 and an open interest of 15,749. The implied volatility is 10.8, and the chance of breakeven is 22.49. The historical volatility for PFE is 16.21 for 1 month, 15.10 for 3 months, and 13.03 for 1 year.
Our previously reviewed credit put spread options play, published on November 6, 2012, of Feb. 16, 2013 $21/$23 can be closed with 20.6% profit on margin. For bullish investors, a credit put spread of April 20, 2013 $23/$25 can be reviewed to gain some upside potential while having a plan to acquire PFE stock at a price below $25.00.
The Coca-Cola Company
The Coca-Cola Company is the world's largest non-alcoholic beverage company, which owns or licenses and markets more than 500 non-alcoholic beverage brands, including Coca-Cola, Diet Coke, Fanta, Sprite, Dasani, Powerade, and Minute Maid. KO closed at $37.70 with 0.51% gain on Friday. The volume of 14.06M was 1.81% more than the 30 day average volume of 13.81M. KO had been trading in the range of $33.51-$40.67 in the past 52 weeks. KO has a low beta of 0.51.
6 Bullish Factors
- KO has one of the widest moats in the consumer beverage industry. The company is well positioned to take advantage of the strong international growth through its diversified brands and extensive distribution network.
- On October 18, 2012, the Board of Directors had authorized a new share repurchase of 500 million additional shares of the Company's common stock.
- Coca-Cola FEMSA SAB, the largest bottler of the soft drink in Latin America, agreed to buy Grupo Yoli SA in a deal valued at $700M to expand in southern Mexico. Analysts said Yoli will add to earnings since year one, and the acquisition makes sense from a strategic, synergistic and accretive standpoint. Around 31.6% of Coca-Cola FEMSA's share is controlled by the Coca-Cola Company.
- Improving image against obesity. KO released a two minute video, "Coming Together" as a part of its initiative to fight obesity. The Coca-Cola Company is promoting the need for a healthy lifestyle, which incorporates balanced diet and exercise. Emphasis is laid on burning off the calories. The second advertisement, "Be OK" will focus on how burning off Coke's 140 calories could be fun.
- Fundamentally, KO has a total cash of $18.08B and generates an operating cash flow of $10.51B with a levered free cash flow of $6.42B. KO provides investors with a steady dividend at an annual yield of 2.71%. KO's dividend is safe with 52% payout ratio. KO has revenue growth (3 year average) of 13.4, which is higher than the industry average of 6.2. KO has a higher operating margin of 22.1%, ttm, and a net margin of 18.5%, ttm, as compared to the industry averages of 17.4% and 12.0%, ttm, respectively. KO's ROE of 26.5 is the same as industry average. KO's P/E of 19.6 is slightly lower than the industry average of 19.8.
- Technically, KO is bullish with the MACD (12, 26, 9) showing a bullish trend and the RSI (14) indicating a strong buying momentum. KO is currently trading above its 50-day MA of $37.05 and 200-day MA of $37.42.
Deutsche Bank cut the 2013 volume and EPS estimates on KO as global soft drink consumption growth has slowed. The analyst maintained a "Buy" rating with a $42.00 price target. Deutsche Bank cut the 2013 volume and EPS estimates on KO as global soft drink consumption growth has slowed. Argus also downgraded KO's rating from Buy to Hold.
The most active call was Feb. 15, 2013 call at the strike price of $37.50 with a volume of 3,376 and an open interest of 20,124. The implied volatility is 13.4, and the chance of breakeven is 36.44. The historical volatility for KO is 16.08 for 1 month, 14.30 for 3 months, and 12.95 for 1 year.
The previously reviewed credit put spread options play of Jan. 13, 2013 $35/$36.25 put, published on October 22, 2013, had expired worthless and resulted the maximum return of near 33% on margin. For bullish investors, a new credit spread will be reviewed, which will allow investors to acquire KO stock at a lower price while gaining some upside potential.
- Short 1x May 18, 2013 put at the strike price of $35.00 for the credit of $0.46
- Buy 1x May 18, 2013 put at the strike price of $32.50 for the cost of $0.19
The maximum profit is $0.27, and the maximum loss/margin requirement is $2.23 ($2.5 loss - $0.27 credit received). If KO closes above $35.00 on May 18, 2013, 12.11% return on margin will be gained. If KO falls below $35.00 upon options expiration, KO stock will be acquired at $34.73, which is 7.88% lower than the current price of $37.70.
Note: All numbers/prices are quoted from the closing of January 18, 2013 with the data provided from Barron's, Morningstar, Schaeffer's Investment Research, Inc., Google Finance, and Yahoo! Finance. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.