MetLife: Although Sensitive To Interest Rates, Shares Offer Upside

MetLife (NYSE:MET) posted substantial gains early in 2021 as interest rates rose, but the stock has languished since early May. The trailing 12-month price return is 3.14% , the expected total return for the next 12 months is 20%.

Market-Implied Outlook for MET/h2

I have analyzed call and put options at a range of strike prices, all expiring on Jan. 21, 2022, to generate the market-implied outlook for the 2-month period from now until that date. I have also calculated the market-implied outlooks for the next 3.9 months (from options expiring on Mar. 18, 2022) and the next 6.8 months (using options that expire on June 17, 2022).

The standard presentation of the market-implied outlook is in the form of a probability distribution of price return, with probability on the vertical axis and return on the horizontal.

Source: Author’s calculations using options quotes from E-Trade.

The outlook for the next 2 months has generally comparable probabilities for positive and negative returns, although the maximum probability is slightly tilted to favor positive returns. The annualized volatility calculated from this distribution is 28.5%.

To make it easier to directly compare the probabilities of positive and negative returns, I rotate the negative return side of the distribution about the vertical axis (see chart below).

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

This view shows that the probabilities of positive returns are consistently higher than for negative returns for a wide range of the most-probable outcomes (the solid blue line is above the dashed red line over the left ⅔ of the chart. This is a bullish indicator.

Theory suggests that the market-implied outlook tends to be negatively biased (assigning too high a probability to negative returns) because investors, in aggregate, are risk averse and thus tend to overpay for put options. There is no way to rigorously measure or correct for this bias, but considering this tendency, the outlook for the next 2 months looks even more bullish.

The outlook for the next 3.9 months is also slightly bullish, with the probabilities of positive returns consistently greater than, or at least equal to, the probabilities for negative returns for the most-probable outcomes. The annualized volatility calculated from this outlook is 29.0%.

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

The 6.8-month outlook, from now until June 17, 2022, does not favor positive or negative returns. There are ranges of outcomes with higher probabilities of positive returns and others with higher probabilities of negative returns, but the variability looks like noise. Because of the expected negative bias in the market-implied outlook, this view to the middle of 2022 looks slightly bullish. The annualized volatility calculated from this outlook is 30.3%.

Source: Author’s calculations using options quotes from E-Trade. The negative return side of the distribution has been rotated about the vertical axis.

The market-implied outlooks tell a consistent story, with a bullish outlook to early 2022, diminishing in strength towards the middle of the year. The options trading volume is quite low for the June options, so I put less weight on the outlook. The expected volatility for MET is quite stable, with an average value of around 29%.

Summary/h2

MET shares peaked in early May and have lacked direction since, consistent with interest rates and bond yields. MET delivered solid results in Q3, but the shares have fallen since that report. The Wall Street consensus outlook was bullish in late April and continues to be bullish, but the consensus 12-month price target has risen, such that the expected total return for MET over the next year is 20%.

The market-implied outlook for MET in late April, looking out to January 2022, was neutral. Today, the outlook to early 2022 is bullish, becoming more neutral by the middle of the year. As a rule of thumb for a buy, I want to see an expected 12-month return that is at least half the expected (annualized) volatility.

The expected 12-month return from the Wall Street consensus is 20% and the expected volatility from the market-implied outlook is 29%, so MET exceeds this threshold. While MET’s returns are sensitive to interest rates and predicting rates is fraught with uncertainty, I am upgrading MET to a bullish rating.