Earlier we discussed the private and public investment environment for internet based service companies like on-demand delivery (MorningWord 12/13/16 – Deliverance). Basically some of the enthusiasm for these companies has waned since what as a fairly active period for investment and m&a in 2014.
Which brings me to some unusual call option activity in shares of Yelp Inc (YELP), the online business review service. When shares of YELP were $36.34 shortly just before 11am a trader bought to open 2500 Feb 38 calls for $2.30. These calls break-even at $40.30, up nearly 11% on February expiration. As a little tip when figuring out whether an option that traded outright was bought or sold, it can be helpful to keep an eye on intra-day implied volatility moves which affect the price of the options. In this case, as I write 30 mins after the call purchase, the stock is in the same spot, yet the Feb 38 calls are 2.45 bid, offered at 2.60, clearly demonstrating upward pressure on the price of the option.
Shares of YELP are up 26% on the year, and up 150% from its 52 week and all time lows made in mid February.
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YELP ytd from Bloomberg[/caption]
What strikes me about the year to date chart is that the near 45 degree angle the stock has been on since the lows has been accompanied by three massive consecutive post earnings gaps of 24%, 13% and 10% since May. The stock’s near 10% short interest might have something to do with the gaps, the decline in short interest has occurred as the stock has been on the incline and the gaps have gotten smaller in percentage terms.
Since going public in 2012 the company has had one year of GAAP profitability in 2014, and that was $8.3 million in GAAP net income on sales of $377 million. This year the company is expected to have $713 million in sales, lose 11 cents a share on a GAAP basis, 72 cents adjusted with GAAP net income loss of $10.5 million, or $55 million gain adjusted. The stock trades 4x price to sales and 15x ev/ebitda which seems fair in the sector.
From purely a technical perspective, $40 looks to be long term technical resistance, but given lack of profitability and decelerating sales growth (expected to be 30% in 2016, 25% in 2017, down from 46% in 2015) I’d be shocked to see a takeout much above 6x trailing 12 month sales of $712, $4.3 billion so maybe high $40s or low $50s:
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YELP since 2012 ipo from Bloomberg[/caption]
The next identifiable catalyst for shares of YELP will be their Q4 results in the first week of February. If I were inclined to play for a stock in the $40s post results, or possibly a takeout price near $50 I might consider call calendars after the stock’s sharp ytd rally.
So what’s the trade?
As we said, vol is now higher in Feb. But that’s also a good sign that some fireworks are possible (or a continuation of trend). But buying higher vol stings. So to take some of the sting out of it you can sell the same strike that expires on Dec 30th:
YELP (36.40) Buy the Dec30th/Feb 30th 38 call calendar for 2.00
- Sell 1 Dec30th 38 call at .60
- Buy 1 Feb 38 call for 2.60
Rationale – Ideally the stock is higher into year end, and near the 38 strike without any gaps. At that point the short call could be rolled into Jan or Feb, further reducing cost and premium at risk. The idea is to buy time until February and whittle down premium at risk to the least amount possible and be left with a call or a call spread for earnings and any other surprise events in the beginning of 2017. The sale of the call on Dec30th will help if the stock consolidates or goes a little lower but it will not help if the stock goes substantially lower.