Wall Street firms all have derivatives departments that are charged with coming up with large and often daily amounts of exotic strategies. From simple covered call writing ideas to extremely complex collars and put selling, they constantly screen stocks, especially ones within their own research coverage universe for ideas to promote to their client base.
UBS has a derivatives department that regularly posts research on over-writing calls on stocks. Often these stocks are rated Neutral or Sell and the analysts expect them to at best trade sideways, or hopefully to trade down. In a recent research report, they specifically mention six companies that they advise investors not to use an option strategy on, as they expect near-term catalysts to drive the stocks higher.
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Here are the six stocks the UBS team expects to have catalysts that will drive near-term stock outperformance.
Abercrombie & Fitch Co. (ANF) has slowly but surely started to rebuild what once was a very dominant brand, and it has a huge 19 million followers on Facebook. The UBS analysts cite continuing share repurchases, leaner inventory and improving fashion offering as catalysts that soon could drive earnings and the stock higher. Investors are paid a 1.9% dividend. The Thomson/First Call consensus price target is $44.20. Shares closed Thursday at $39.39.
Air Products & Chemicals Inc. (APD) provides atmospheric, process and specialty gases, as well as performance materials, equipment and technology. The UBS analysts say to not overwrite or hedge this stock for 60 days. They see activist investors becoming much more aggressive in the name over the next two months. Investors are paid a 2.4% dividend. The consensus price target is $122.44, but the stock closed Thursday at $128.74.
PetSmart Inc. (PETM) is a top name in the fragmented pet supply area, and two activist investors very involved with the stock now. In fact, PetSmart is currently talking with Wall Street investment banks for possible strategies as the activist pressure to unlock value has stepped up. Investors are paid a 1.4% dividend. The consensus price target is $61.52. PetSmart closed trading Thursday way above that at $69.05.
Teva Pharmaceuticals Industries Ltd. (TEVA) is one of the world's largest generic drug manufacturers, and it is well positioned to take advantage of the high number and dollar amount of branded drugs going off-patent over the next few years. In addition, the UBS team sees higher volatility in the space, and with mergers and acquisitions rampant, they would not be hedging the stock in any way now. Investors are paid a 2.2% dividend. The consensus price target is $57.25. Shares closed Thursday at $53.65.
Tesla Motors Inc. (TSLA) has been the momentum buyer's dream stock over the past year. The electric car maker has historically been very volatile around earnings time, and it is currently scheduled to report on July 3. The UBS team also mentioned the possibility of a Gigafactory announcement, which could boost the stock as well. The consensus price target for the stock is $224.83. Tesla shares ended Thursday at $215.40.
Weyerhaeuser Co. (WY) is a forest products company that grows and harvests trees, builds homes and manufactures forest products worldwide. It grows and harvests trees for use as lumber, other wood and building products, and pulp and paper. After it completes a corporate structural change, the UBS analysts expect volatility as it unwinds. They also point to an expected capital allocation announcement in a month could also prove to be a catalyst. Investors are paid a 2.8% dividend. The consensus price target is $33.78. Shares closed Thursday at $32.25.
While the specific catalysts may or may not play out, they are noted by a large firm that has Neutral and Sell ratings on the six stocks. All the companies are growth stocks, and some are speculative. Trading on this research is only suitable for investors with a very high risk tolerance.