3 Options Trades Goldman Is Watching With Catalysts Coming

Goldman Sachs’ Katherine Fogertey noted that the options market was overlooking some important catalysts for several single stocks. Fogertey recommended additional investments in LPL Financial Holdings Inc LPLA, Johnson & Johnson JNJ and Affiliated Managers Group, Inc. AMG.

LPL Financial Holdings Inc

Goldman Sachs recommended buying LPL Financial Holding puts to hedge negative risks around higher fee products and earnings.

A new fiduciary rule by the Department of Labor may have negative implications for LPL Financial Holdings. The new rule is expected to expand the responsibility of investment advisors to include low management fees, besides the suitability requirements.
Analyst Conor Fitzgerald believes that “variable annuity sales, which make up 40% of Sell rated LPLA’s commission revenue, are likely to decline regardless of the DOL fiduciary rule given the interest rate environment – however, this presents an incremental source of uncertainty.”
Fogertey noted that option investors were pricing in the potential for LPLA shares trading at about 10 percent by the April expiration. He added that the company’s earnings on April 28 could be an additional negative catalyst.

Johnson &Johnson

Fogertey also recommended Buying Johnson & Johnson options ahead of its earnings and Analyst Day.
Analyst James Rubin expects investors and media to show increased focus on Johnson & Johnson’s internal transformation, including a potential break-up strategy. The analyst estimates “JNJ’s sum of the parts value at $120/share, and believes the Consumer business is worth about $17/share in value.”
A major catalyst for the company would be its Analyst Day on May 18, which may further highlight its strategic potential. The company’s earnings announcement on April 19 is another catalyst, Fogertey pointed out.
“Despite the potential for shares to realize a big move on an update around earnings and/or the Analyst Day, JNJ three month implied volatility of 14% is only in the 18%-ile over the past year and is 4 points below realized. We believe option prices are too low,” the report mentioned.

Affiliated Managers Group

Goldman Sachs recommended Buying Affiliated Managers’ calls for the key inflection point in its flows.
Analyst Alex Blostein sees 31% upside to “CL-Buy AMG” shares over the next year. The analyst noted that the company’s shares trade at a 20 percent discount to the historical levels.
An inflection in Affiliated Managers’ 1Q flow is expected to act as a positive catalyst, Blostein believes. “The largest sources for inflows are AQR’s mutual fund (+$5bn) and less outflows from Yacktman (-$0.7bn QTD, vs. -$2.4bn in 4Q15),” he added.
The company’s good performance and structurally relevant AUM mix point towards robust flows in the remainder of 2016.
“Options are underpricing the potential for shares to trade up sharply on earnings; buy calls. AMG options are pricing in a +/-4% move for earnings, which is just in-line with the median move over the past 4 quarters, despite our analyst’s view that flows are likely to inflect positively this quarter, and shares could trade up sharply on the back of that and better margins,” the Goldman Sachs report stated.