One of the oldest and best ways to get leverage for stock trading is to utilize the options markets. While to some it may seem like an exotic (and dangerous) way to trade, in reality using options can offer a much lower cost scenario to own a larger position. Each call option contract represents 100 shares of a stock. So, five contracts equal 500 shares, 10 contracts would equal 1,000 shares and so on.
In a new research report, Goldman Sachs screened its Buy-rated stocks looking for companies with reasonable options prices and where the stock has lagged the recent, technology-driven upside move. The report noted this:
Investors have turned optimistic on the equity markets with broad market indices like S&P 500/NASDAQ already recording a strong +11%/+22% rally over the past 3 months respectively (+14%/+37% year-to-date). This has coincided with a decline in single stock volatility, which now hovers near a 3 year low, driven by a multitude of macro factors including receding recession fears, easing interest rate uncertainty, healthy employment and declining inflation. Given this backdrop, we see a potential rally in stocks where Goldman Sachs analysts are Buy rated and option prices are attractive, but investors are not yet bullishly positioned.
Ten top companies made the list, and five look very attractive now on a risk-reward basis. They also offer the biggest potential upside when investors buy 12-month “at the money” calls. While all are Buy rated at Goldman Sachs, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
For options traders, here is the methodology for the implied returns from Goldman Sachs analysts:
Implied returns on buying 12-month over-the-counter, at-the-money calls on Goldman Sachs buy-rated large-cap liquid stocks that are year-to-date laggards, where 6-month implied volatility is below median levels and 6-month normalized put-call skew is above median levels; Prices of 12-month OTC at-the-money calls; Call prices at mid-mkt; 6-month 50 delta call implied volatility and 1-yr percentile ranks.
This top company remains a solid pharmaceutical stock to own long term and is offering an outstanding entry point after a big tumble. Bristol Myers Squibb Co. (NYSE: BMY) discovers, develops, licenses, manufactures and markets pharmaceutical products worldwide in the hematology, oncology, cardiovascular and immunology therapeutic classes.
Bristol Myers Squibb products include the following:
- Revlimid, an oral immunomodulatory drug for the treatment of multiple myeloma
- Opdivo for anti-cancer indications
- Eliquis, an oral inhibitor targeted at stroke prevention in adult patients with non-valvular atrial fibrillation, and the prevention and treatment of venous thromboembolic disorders
- Orencia for adult patients with active RA and prostate-specific antigen, as well as reducing signs and symptoms in pediatric patients with active polyarticular juvenile idiopathic arthritis
- Sprycel for the treatment of Philadelphia chromosome-positive chronic myeloid leukemia
- Yervoy for the treatment of patients with unresectable or metastatic melanoma
- Abraxane, a protein-bound chemotherapy product
- Empliciti for the treatment of multiple myeloma
- Reblozyl for the treatment of anemia in adult patients with beta thalassemia
The implied return of the 12-month option position would be 311%, according to Goldman Sachs.
Shareholders receive a 3.52% dividend. Goldman Sachs has a price target of $89 on Bristol Myers Squibb stock. The consensus target is $74.05, and shares closed trading on Wednesday at $64.16.
Simon Property Group
Shares of this leading company have been pounded and are offering the best entry point since last year, and it is a strong idea for investors looking to play the commercial real estate subsector. Simon Property Group Inc. (NYSE: SPG) invests in real estate markets across the globe, engaging in investment, ownership, management and development of properties. The company primarily invests in regional malls, premium outlets, mills and community/lifestyle centers to create its portfolio.
Through its subsidiary partnership, Simon Property owns or has an interest in about 230 properties in the United States and Asia. The company also has a 28.9% interest in Klepierre, a European real estate investment trust with over 260 shopping centers in 13 countries.
The implied return for the 12-month call is estimated to be 250%.
Simon Property Group stock investors receive a 6.73% distribution. The $152 Goldman Sachs price target is well above the $130.21 consensus target and Wednesday’s close at $110.90.
The athletic shoe and apparel giant is hugely popular in China and across the world. Nike Inc. (NYSE: NKE) designs, develops, markets and sells athletic footwear, apparel, equipment and accessories worldwide under the Jumpman, Converse, Chuck Taylor, All Star, One Star, Star Chevron, and Jack Purcell trademarks.
In addition, Nike sells a line of performance equipment and accessories, comprising bags, socks, sport balls, eyewear, timepieces, digital devices, bats, gloves, protective equipment and other equipment for sports activities under the Nike brand, as well as various plastic products to other manufacturers.
The company markets apparel with licensed college and professional team and league logos, as well as sells sports apparel. Additionally, it licenses unaffiliated parties to manufacture and sell apparel, digital devices and applications and other equipment for sports activities under Nike-owned trademarks.
The company sells its products to footwear stores; sporting goods stores; athletic specialty stores; department stores; skate, tennis and golf shops; and other retail accounts through Nike-owned retail stores, digital platforms, independent distributors, licensees and sales representatives.
The implied return for the 12-month call is set at 176%.
The dividend yield here is 1.27%. The Goldman Sachs target price is $148, while the consensus target is $124.17. Nike stock closed almost 6% higher on Wednesday at $112.86.
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With a very strong balance sheet, this company looks poised for a solid finish to 2023. NextEra Energy Inc. (NYSE: NEE) generates, transmits, distributes and sells electric power to retail and wholesale customers in North America. The company generates electricity through wind, solar, nuclear, coal and natural gas facilities.
NextEra Energy also develops, constructs and operates long-term contracted assets that consist of clean energy solutions, such as renewable generation facilities, battery storage projects and electric transmission facilities. It sells energy commodities, and it owns, develops, constructs, manages and operates electric generation facilities in wholesale energy markets.
As of December 31, 2022, the company had approximately 32,100 megawatts of net generating capacity, approximately 88,000 circuit miles of transmission and distribution lines and 871 substations. It serves approximately 12 million people through approximately 5.8 million customer accounts in the east and lower west coasts of Florida. The company was formerly known as FPL Group and changed its name in 2010.
The implied return for the 12-month call is 96%.
Investors receive a 2.52% dividend. Goldman Sachs has set its price objective at $90, but NextEra Energy stock has a $92.58 consensus target. The shares closed on Wednesday at $74.40.
A whopping 45% of fund managers recently surveyed have bought shares of this company. UnitedHealth Group Inc. (NYSE: UNH) operates through the following four segments.
Its UnitedHealthcare segment offers consumer-oriented health benefit plans and services for national employers, public sector employers, midsized employers, small businesses and individuals; health and well-being services to individuals age 50 and older, addressing their needs for preventive and acute health care services, as well as services dealing with chronic disease and other specialized issues for older individuals; and Medicaid plans, Children’s Health Insurance Program, and health care programs; and health and dental benefits.
The OptumHealth segment provides access to networks of care provider specialists, health management services, care delivery, consumer engagement and financial services. This segment serves individuals through programs offered by employers, payers, government entities and directly with the care delivery systems.
The OptumInsight segment offers software and information products, advisory consulting arrangements, and services outsourcing contracts to hospital systems, physicians, health plans, governments, life sciences companies and other organizations.
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