Author: Noah Kiedrowski

Disney - Irrational 52-Week Low

Posted on by Noah Kiedrowski

Disney's market capitalization had been eviscerated by over 30%, and the stock price hit an irrational 52-week low in early December. Disney's valuation has been in a tug of war between its legacy business model and its streaming initiatives. Disney should be in the sweet spot of capitalizing on the pent-up post-pandemic consumer wave of travel and spending at its parks while being the new and preferred stay-at-home content provider via Disney+. However, the former has been altered due to uncertainty over the newest omicron coronavirus variant while the latter continues to build out content and expand its membership base.

Disney (DIS) has rolled out a wildly successful array of streaming initiatives that catered to the stay-at-home economy during the pandemic. These streaming efforts have transformed Disney's business model, which its legacy businesses will further bolster as the world economy prospects continue to improve and reopen, albeit minor bumps in the road.

Taken together, Disney has set itself up to benefit across the board with its streaming initiatives firing on all cylinders and theme parks coming back online. The company has been posting phenomenal streaming numbers that have negated the negative pandemic impact on its theme parks. This streaming-specific narrative will change as the theme park revenue comes back online and flows into the company's earnings. As a result, Disney presents a very compelling buy for long-term investors as the synergy of its legacy business segments get back online in conjunction with its wildly successful streaming initiatives, all of which have more pricing power down the road to expand margins. Continue reading "Disney - Irrational 52-Week Low" →

Moderating Valuations - Deploying Capital

Posted on by Noah Kiedrowski

Recent Turbulence

Inflation, interest rate hikes, employment, Federal Reserve taper, new omicron pandemic backdrop, Washington wrangling, supply chain disruptions, and travel restrictions are culminating and resulting in the current market swoon. September saw a 4.8% market drawdown for the S&P 500, breaking a seven-month winning streak. November saw negative returns, and thus far, December is off to a bad start. Prior to the September meltdown, stocks were very overbought and at extreme valuations as measured by any historical metric. Heading into September, valuations were stretched across the board, with the major averages at all-time highs and far away above pre-pandemic highs.

The recent two-week stretch over the November/December transition was met with heavy and vicious selling. Valuations have moderated overall and cooled investor enthusiasm, especially in the more speculative momentum stocks in cloud software, SPACs, and recent IPOs. The technical conditions (RSI and Bollinger Bands) are shaping up for a strong relief bounce that may coincide with the infamous Santa Claus rally. The tremendous volume of selling has inflicted damage across the board, indicating that valuations do, in fact, matter after all. Many opportunities are presenting themselves, and being too bearish may prove ill-advised over the long term.

Vicious Selling

As of the beginning of December, a third of the S&P 500 is off at least 15% from its high, and nearly one in eight Nasdaq stocks logged a new 52-week low. Furthermore, the CNN Money Fear & Greed Index, a composite of market-based indicators that gauge risk appetite across stocks, bonds, and options, dropped to its 2021 lows, seen during previously equity pullbacks. It has only tended to plunge below this when the market is in near-crash mode, such as December 2018 and March 2020. Continue reading "Moderating Valuations - Deploying Capital" →

Facebook's Evolution - The Metaverse

Posted on by Noah Kiedrowski

The legacy Facebook branding has been officially decommissioned as the company looks to the future with the metaverse in its sights. As such, the newly branded company is conveniently called Meta Platforms Inc. (FB), thus firmly placing the company's future in the metaverse space. Albeit its social media properties will still be vital to the company, Meta believes that its future will be in the metaverse. This rebranding comes at a pivotal time after a string of public relations debacles stretching over several years. The underlying stock has been beaten up over the past month, falling from $384 to $312 or 19% from its 52-week high. This double-digit decline places Meta in very inexpensive valuation territory relative to its technology peers, and it's one of the cheapest high-growth stocks. With a firm pivot towards future end markets via the metaverse along with its social media prowess, its valuation is very appealing at this juncture.

Meta
Figure 1 – Facebook’s rebranding and new Meta logo that reflects the company’s new direction into the metaverse

The Metaverse

Meta strives to be a leader in the nascent metaverse, the intersection of virtual reality, augmented reality, three-dimensional video environment, and an all-encompassing virtual environment. It's a combination of multiple elements of technology, including virtual reality, augmented reality, and video, where users "live" within a digital universe. Supporters of the metaverse envision its users working, playing, and staying connected with friends through everything from concerts and conferences to virtual trips around the world. Mark Zuckerberg estimates it could take five to ten years before the key features of the metaverse become mainstream. But aspects of the metaverse currently exist. Ultra-fast broadband speeds, virtual reality headsets, and persistent always-on online worlds are already up and running, even though they may not be accessible to all. Continue reading "Facebook's Evolution - The Metaverse" →

Company Spin-Offs And Adjusted (ADJ) Options

Posted on by Noah Kiedrowski

Occasionally, businesses undergo corporate restructuring for various reasons. Often this involves spinning off a separate, independent entity to potentially unlock value for shareholders over the long term. Some notable spin-offs include Dow from DowDuPont, Alcon from Novartis, Otis Elevators from United Technologies, and VMWare from Dell. When company spin-offs occur during an options expiration cycle, this can complicate the normal lifecycle of a pending options contract. When this happens, these options are denoted as "adjusted" with the corresponding ADJ within the options chain. One of the most recent notable spin-offs was Kyndryl (KD) from International Business Machines (IBM), as these two broke apart and traded as separate entities during an actively pending option contact. The share split ratio changes the deliverable of the option contract and thus requires normalizing the two entities relative to the original contract value when adjusting for the new strike price. This normalizing is necessary as shares may ostensibly be in the money; however, as a function of the share split ratio, the option contract is out-of-the-money and not assignable.

Options

Figure 1 – IBM spin-off of Kyndryl and its impact on pending options as seen via a Trade notification service - Trade Notification Service

Breaking Down An Adjusted Option

IBM completed a business spin-off of (KD) that publicly traded as a separate company. The share spin-off was a 1:5 share split translating into every 100 shares of IBM; the shareholder also receives 20 shares of KD. As such, any options that were active during the spin-off experienced a deliverable change that was equivalent to 100 shares of IBM plus 20 shares of KD. Continue reading "Company Spin-Offs And Adjusted (ADJ) Options" →

Navigating Volatility: Options-Based Portfolio

Posted on by Noah Kiedrowski

Introduction

Controlling portfolio volatility is essential as the broader markets continue to break record high after record high along with violent pullbacks. The past three-month stretch of September-November was a prime example as the markets pushed to new all-time highs early in September then suffered a significant sell-off in the same month where the Dow Jones was down as much as 6%. October saw a bounce back into positive territory with new all-time highs set. Then November saw a dichotomy between the Nasdaq continuing to break out to new highs while the Dow Jones experienced significant weakness.

Amid this mixed market and broader index bifurcation, entire sectors were decimated. The payment space was heavily impacted with PayPal (PYPL) and Visa (V) taking huge market capitalization reductions by 37% and 21%, respectively. Quarterly reports have been detrimental for companies that report slight misses or in-line numbers with poor guidance. Disney (DIS) and International Business Machines Corporation (IBM) saw their stocks plummet 24% and 20%, respectively from their 52-week highs. An options-based portfolio can offer mitigation against these pockets of extreme volatility while generating consistent and smoother returns.

Options-Based Risk Mitigation

Risk mitigation can be achieved via a blended options-based approach where the portfolio is broken out into three components. Cash, long equity exposure, and an options component are the three pillars of an options-based portfolio strategy. Options alone cannot be the sole driver of portfolio appreciation. However, options can play a critical component in the overall portfolio construction to control volatility and mitigate risk. Continue reading "Navigating Volatility: Options-Based Portfolio" →