In the dictionary, accumulation comes before appreciation. The same is true for Wall Street. Money managers try to stockpile companies they like before prices head higher. Investors would be wise to put on their Sherlock Holmes’ hat, grab the magnifying glass and hunt for stocks institutions are buying in bulk.
We’ve developed a system to measure accumulation and distribution of equities based on net buying or selling in the previous week of trading. In our view, accumulation happens when prices close higher than they opened. It means there were more buyers than sellers. The converse is true for stocks that close lower than they opened (distribution).
With this framework, we can identify stocks that “smart money” is acquiring and unloading.
Little Sorrento Therapeutics, Inc. (SRNE) exploded on Friday, May 15, 2020. The small biotech gained more than 158% after the company announced its “STI-1499 antibody demonstrated 100% inhibition of the COVID-19 virus infection of healthy cells.” More than $1.1 billion of net money flowed into SRNE during the last five-days of trading, with nearly all the inflow occurred after the announcement.
While SRNE topped the money in leaderboard, its not our favorite type of accumulation stock as the reaction was news driven. Instead, we prefer stealth buying.
NVIDIA Corporation (NVDA) ranked #3 and was the first without the company releasing news. (Grubhub Inc. (GRUB) was #2, but it was driven by news of a possible merger with Uber Technologies, Inc. (UBER).) Nearly $600 million dollars moved into the chipmaker last week.
The move is attention catching because NVDA is set to report their first quarter earnings after the market closes on Thursday, May 21, 2020. That’s a lot of confidence rolling into NVDA on the eve of their quarterly checkup. Especially considering its stock price tends to move aggressively in the days surrounding earnings announcements.
Based on the company’s recent history, its highly likely that management delivers a bullish surprise. By our count, NVIDIA has topped Wall Street’s consensus forecast 18 of the last 19 quarters. The first quarter has been exceptionally strong with average result beating the street’s call by 22%.
Despite smoking past anticipated results, NVDA shares dipped in the days surrounding the last pair of first quarter announcements, falling slightly. In the previous pair of Q1 announcements, the stock jumped more than 10% both times.
Overall, the chipmaker’s shares turned green in 12 of the last 19 times they reported financial results. In the dozen times Wall Street cheered NVDA’s numbers, the stock popped by an average of 10%, as much as 25% and as little as 1.5% in days before and after the announcement. The unlucky seven drops averaged a loss of approximately 6%, tumbled a max of 16% and as lost little a 0.5%.
It appears speculators are betting heavily on NVIDIA’s shares popping in the days ahead when comparing put and call options activity. On Friday, call volume was more than seven times put volume for the three contracts bracketing (three above and three below for a total of six) it’s closing price of $339.63. By the same measure, open interest on the call side outpaces puts by more than 18 to 1.
The most activity by far was in the June $350 call with more than 2,600 contracts traded. Considering the last $350 call traded for $19.19 on Friday, the semiconductor stock would most likely need to move at least $25-$30 for the June $350 calls to remain profitable. From experience, a lot of volatility is priced into options prior to earnings announcements. That volatility premium tends to evaporate the day after the news.
Analyzing NVIDIA Corp’s stock chart, we see the company zoomed to a 52-week high to close out last week’s trading. The last time shares made a similar move was in October 2016. Way back then, NVDA popped roughly 25% in the days surrounding its third quarter results.
More than a half billion of accumulation, lopsided options contracts, and similar chart patterns hint that something might be up Thursday afternoon.