Key points
- Rampant buying of call options on these three stocks could indicate higher prices and traders could be justified.
- Buffett is behind Pulte’s construction boom, and a takeover bid could boost Spirit AeroSystems.
- Hims & Hers Health stock just hit profitability, and analysts believe EPS could be even higher.
- 5 stocks we prefer to Citigroup
When traders rush into call options, it typically means they expect an event to occur, pushing the underlying stock higher soon. Since options expire on a certain date, these traders must get their thesis right before expiration or risk losing their entire investment.
Today, three stocks are showing unusual call options activity, which could lead investors to reverse engineer these decisions and find out why stocks like them Spirit AeroSystems Holdings Inc. New York Stock Exchange: SPR, His and Hers Health Inc. NYSE: HIMand even PulteGroup Inc. NYSE: PHM can outperform the market in the coming months.
Despite being part of completely different sectors, these stocks share a tailwind created by the Federal Reserve (the Fed) and the potential interest rate cuts that could hit the market as early as May or June 2024. Investors can observe traders’ expectations on these cuts followed the FedWatch tool al CME Group Inc. NASDAQ: ECM.
All part of a single machine
Because the Fed could cut interest rates by the end of the year, analysts say The Goldman Sachs Group Inc. NYSE:GS they expect a breakthrough in the US manufacturing sector, so fat that they were right in their report on the macroeconomic outlook for 2024.
According to export data, which rose 6.4% in February’s ISM manufacturing PMI index, foreign nations expect a lower dollar to make American goods more attractive for purchase.
Increased economic activity equals job creation and increased corporate profits, and that’s exactly where Warren Buffett expected a housing boom when he bought stocks like PulteGroup. In the medical sector, 66,700 jobs were added last month, while the entire economy created a total of 275,000 jobs.
A wave of hiring could help stocks like Him and Her, and a construction boom could be one reason traders sided with Buffett in his PulteGroup play, but what about Spirit?
Spirit AeroSystems: a special situation
After a recent scandal involving a Boeing Co. NYSE: BA 737 MAX 9 crash, media blamed Spirit for faulty piece of equipment.
However, Boeing soon realized that the company wasn’t really to blame, but rather a factory in Malaysia. Seeking to secure one of its largest supplies, Boeing is now “in talks” to create a takeover bid to buy Spirit, news that sent the stock rallying 25% in March 2024.
While these are still speculative “talks,” it is likely that Boeing may actually come through with an offer. Now that airline stocks like it Southwest Airlines Inc. NYSE:LUV Despite lower forecasts for the year due to delays in Boeing jet orders, the company may be looking to consolidate its supply chain and avoid further conflicts.
In January 2024, analysts at Citigroup Inc. NYSE:C saw a valuation as high as $39 per share for Spirit stock. Considering this price target still stands today, investors could expect Boeing to submit an offer around that valuation, which is 11% higher than today’s prices.
Wall Street wants to see 466% earnings per share (EPS) growth from Spirit this year, which could still cause Boeing to reconsider an even higher offer. In both cases, the evidence piled up for traders to justify a rush to buy call options.
His and hers is on the way
After reporting its first profitable quarter, Hims & Hers shares rallied sharply, but traders believe they can recover even stronger. After a surge of up to 85% since the earnings announcement, the stock could be positioned to continue to deliver the kind of results that other medical stocks simply can’t deliver.
Known for having a low beta, medical stocks typically don’t move much. As a $3.4 billion company, Hims & Hers could have a much higher ceiling now that the company has proven to be profitable in the market, especially with analysts predicting 130% EPS growth this year.
Compared to the industry, Hims & Hers shares trade at a price-to-book ratio of 9.8x, a 177% premium to the 4.5x multiple seen in the industry. There must be a good reason why investors are willing to overpay for the stock portfolio, and that reason could be future growth now that the company has achieved profitability.
Citigroup analysts expect the stock to rise to $16 per share, where before February they only had a valuation of $12. Now that the company is delivering on its promises, investors could expect to see even higher price targets in the future, supporting their call options positions.
Before you consider Citigroup, you’ll want to hear this.
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