The suits are no longer in charge

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In this edition of the Alpha Letter, we cover: 

  • Stocks & Options: Midcaps with hot call options

  • Investing Strategy: How has social media changed investing?

Stocks & Options

Let’s take a look at some small and mid cap stocks that are on fire in the options market.

By “on fire”, we mean calls with unusually high volume in the most recent trading day when compared to the previous ten days. We get this data from the Options Matrix (check it out here). They define on fire as option volume that’s 500%+ greater than the previous 10-day average.

Heating up calls don’t always mean a stock is about to pop - there are a lot of reasons why calls might see a spike in volume, and they’re not all bullish.

This scan is just a starting point. It gives us a list of names to look further into.

Let’s take a look at some on-fire calls among stocks in the Russell 2000. Here’s a sample of what shows up:

On fire calls help me find stocks that may be moving sharply in the coming days. I just want to make sure I’m not buying into stocks that have already made the move - for example, maybe the unusual options activity happened in the morning, and the price action died down in the afternoon. Make sure to get the whole story on why the stock is moving (if it’s already moved) before making a trade.

I also look for options that have high open interest. The large option volume in GOGO in the first row doesn’t indicate a bullish signal because the open interest is only 2 contracts. 

The 3rd row, CPLG, indicates a more bullish signal because volume and open interest are high. 

Here are a few other calls I’m seeing on this scan:

  • Clean Energy Fuels Corp (CLNE) $16 calls 6/18 expiration - Volume of 4,304 and open interest of 1,182. The $20 calls also have high volume and OI.

  • Sunrun (RUN) $80 calls 11/19 exp - Volume of 1,891 and open interest of 2,833.

  • WW International (WW) $70 calls 1/21/2022 exp - Volume of 1,008 and OI of 4,120.

One other name I want to mention is Workhorse (WKHS). This one is a WallStreetBets favorite and looked poised to follow AMC as of Thursday morning. When stocks like GameStop and AMC rip, we typically see a handful of similar companies benefit a couple days later as traders take profits and look for the next play.

After AMC went on a tear Wednesday, the underlying option activity told us that the following names were next: Build-a-Bear Workshop (BBW), Bed Bath & Beyond (BBBY), and Workhorse, among others.

Check out the options data for WKHS from Thursday’s trading session (courtesy of Vigtec):

If I had to guess, I would say that a few WallStreetBets favorites like Workhorse will do well over the next couple of days, just like we saw after the first GameStop squeeze. However, you should also watch the option flow to get the most up-to-date look at what the markets are doing.

Investing Strategy

Social media has changed the landscape of investing. But how deep do those changes go?

This thread from Morgan Housel got me thinking:

In the chaos of the market, countless pundits on CNBC compare current conditions to the Dot Com Bubble of the late 90’s and early 2000’s. Listening to CNBC yesterday morning, I heard the comparison at least twice per hour.

I have always felt that comparison is ill-advised. Yes, there are some similarities, but investors are often biased to think that history will repeat itself exactly. They look at the last two major crashes (Dot Com and 2008) and think that the exact same scenarios will play out.

However, we also know that no two crashes are exactly alike. Tech is much more of an ingrained part of society; stocks like Netflix and Facebook aren’t the speculative zero-revenue stocks of 2000 (which do exist today, but tend to be in the electric vehicle spaces much more than in software or internet businesses).

Many of those old school investors who constantly compare today to 1999 also fail to see how social media has changed investing. It may seem ridiculous that millions of Redditors decide to run up a stock, but that phenomenon is not going anywhere. 

Social media makes it possible to spread an idea to millions of people in just a matter of hours - that magnitude of capability didn’t exist in 1999.

This doesn’t mean the market can’t crash again. Of course it will - that’s one of the inevitabilities of the market. But people need to accept that we are past the times of hedge fund managers and other “suits” alone determining the allocation of capital and how market “should” function.

Morgan sums it up perfectly:

New Top Idea

I’m pretty bullish on the met coal space for the back half of 2021. Prices of met coal are increasing. The price of steel is through the roof. And all of these met coal producers are trading like they don’t have a terminal value (think 3-4x EV/EBITDA).

I’ve identified one met coal producer that I think will start to generate a significant amount of free cash flow in the coming quarters. Not only will this company be printing cash flow due to the rising met coal prices, but it stands out from its peers. Zero environmental or black lung liabitlies. A squeaky clean balance sheet. And the potential to start paying shareholders a quarterly dividend.

I have been aggressively buying shares of this company and plan to drop my research report in the coming days. Get exclusive access to this idea that I think could be worth double the current market valuation over the next 12-18 months.

Alpha Thought