Schaeffer's Trading Floor Blog

Analyst Downgrades: Adobe Systems Incorporated, The Gap Inc., and Wynn Resorts, Limited

Analysts downwardly revised their ratings on ADBE, GPS, and WYNN

by 9/17/2014 9:28 AM
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Analysts are weighing in today on software heavyweight Adobe Systems Incorporated (NASDAQ:ADBE), specialty retailer The Gap Inc. (NYSE:GPS), and casino name Wynn Resorts, Limited (NASDAQ:WYNN). Here's a quick roundup of today's bearish brokerage notes on ADBE, GPS, and WYNN.

  • ADBE is off more than 4% ahead of the bell, after last night reporting weaker-than-expected third-quarter sales and current-quarter revenue guidance, and getting hit with price-target cuts to $81 (from $82) and $75 (from $77) at RBC and Goldman Sachs, respectively. Taking a step back, the stock has outperformed on the charts, adding 18.1% in 2014. Nevertheless, options traders over the past few months have bet bearishly on Adobe Systems Incorporated. The equity's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.24 ranks in the bearishly skewed 99th percentile of its annual range. Yesterday, ADBE settled at $70.73.

  • Piper Jaffray assumed coverage of GPS with a "neutral" rating. Most on Wall Street have taken a similar view on the shares, as 12 out of 23 covering analysts have given the security a "hold" rating -- compared to 10 "strong buys" and a single "sell" recommendation. Technically speaking, however, The Gap Inc. has performed well, tacking on nearly 13% year-to-date to trade at $44.12. More recently, the shares could be seen outperforming the broader S&P 500 Index (SPX) by 10.7 percentage points during the last two months, and in early September, they hit a 14-year high of $46.85.

  • Finally, WYNN received a pair of price-target reductions from Sterne Agee (to $230 from $245) and Union Gaming Research (to $227 from $253), after Wells Fargo yesterday warned Macau gaming revenues could suffer in September. Separately, WYNN said it won the rights to build a $1.6 billion casino outside of Boston. The expansion plans didn't help the shares, though, which finished slightly lower at $179.87 -- bringing their year-to-date deficit to 7.4%. Elsewhere, option bears have been circling Wynn Resorts, Limited recently, as its 10-day ISE/CBOE/PHLX put/call volume ratio of 1.40 sits in the top quartile of its 12-month range.

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Futures are modestly higher today, as traders take a cautious approach ahead of this afternoon's policy decision from the Federal Open Market Committee (FOMC) and subsequent speech from Federal Reserve Chair Janet Yellen. Among equities in focus, biotech firm Auxilium Pharmaceuticals, Inc. (NASDAQ:AUXL), cloud concern Rackspace Hosting, Inc. (NYSE:RAX), and commodity name United States Steel Corporation (NYSE:X) should all garner their fair share of attention.

  • AUXL is poised for a 44% pop right out of the gate, after Endo International plc (NASDAQ:ENDP) made an unsolicited $2.2 billion cash-and-stock bid for the company. The offer values AUXL shares at $28.10 apiece, a 30.6% premium to last night's closing price of $21.52. In response, Auxilium Pharmaceuticals, Inc. -- which previously agreed to merge with Canada-based QLT Inc. -- said it would review ENDP's offer, but adopted a shareholder rights plan to avert a hostile takeover. Adding to the bullish buzz is a pair of price-target hikes from Mizuho (to $37 from $33) and MKM Partners (to $32 from $26), with both brokerage firms maintaining "buy" recommendations. Heading into today's session, AUXL was up a slight 3.8% year-to-date, prompting a glass-half-empty approach among option traders. Specifically, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 7.10 ranks just 4 percentage points from an annual bearish peak.

  • RAX has plunged 17% in pre-market trading, after the company said it has ended its formal M&A review, which it began in early July, deciding to maintain its independence. Separately, RAX announced Taylor Rhodes will replace Graham Weston as the firm's CEO. The news was met with a price-target cut to $39 from $43 at Piper Jaffray -- in line with the equity's current perch at $39.34 -- which also maintained its "overweight" rating, and a downgrade to "sell" at CLSA. Big moves to the downside are nothing new for RAX, and today's projected move lower could pull the shares into the red on a year-to-date basis. Additionally, Rackspace Hosting, Inc. may be met with another round of bearish brokerage notes, considering seven out of 16 covering analysts maintain a "buy" or better rating toward the equity.

  • X is ready to rally at the open -- up 12.2% ahead of the bell -- after the steelmaker's Canadian unit was granted creditor protection, and the company canceled plans for roughly $800 million in capital investments. United States Steel Corporation has already proven its technical might, with the shares up more than 84% from their June 3 year-to-date low of $22.47 to trade at $41.41. In spite of this upward momentum, nearly one-quarter of the equity's float is sold short, representing more than a week's worth of pent-up buying demand, at X's average daily pace of trading. Should the stock continue its run up the charts, an unwinding of these bearish bets could help fuel the fire.

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    Analyst Upgrades: Skullcandy Inc, Under Armour Inc, and Zulily Inc

    Analysts upwardly revised their ratings on SKUL, UA, and ZU

    by 9/17/2014 8:54 AM
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    Analysts are weighing in today on performance headphone manufacturer Skullcandy Inc (NASDAQ:SKUL), athletic apparel maker Under Armour Inc (NYSE:UA), and e-commerce firm Zulily Inc (NASDAQ:ZU). Here's a quick roundup of today's bullish brokerage notes on SKUL, UA, and ZU.

    • SKUL was initiated with an "overweight" rating at Piper Jaffray. Such optimism is relatively rare for the stock, as two-thirds of covering analysts give it a "hold" or worse rating. This is fairly surprising, given Skullcandy Inc's more than 31% year-over-year advance to trade at $7.58, and its 6.8-percentage-point outperformance of the broader S&P 500 Index (SPX) during the past two months. If the equity maintains this positive trajectory, a round of upgrades or additional positive initiations could materialize.

    • Piper Jaffray started coverage on UA with an "overweight" opinion, rewarding the stock for its 76.4% annual return. Taking a closer look at the charts, shares of the apparel brand took a bounce off their 50-day moving average yesterday to settle at $67.75, potentially setting them up for additional gains. Nevertheless, many on Wall Street aren't convinced that Under Armour Inc is a winner. In fact, 15 out of 25 analysts following the security have doled out "hold" or worse assessments. Should UA continue to outperform, a capitulation among the brokerage bunch -- in the form of additional bullish notes -- could provide tailwinds.

    • Finally, ZU received an initial "overweight" rating and $44 price target from Piper Jaffray. On the charts, however, the stock has had a rough go of it -- shedding nearly half of its value since its late-February record high of $73.50 to land $37.23. On the sentiment front, an astounding 90% of Zulily Inc's float is sold short, which would take more than two weeks to cover, at the stock's average daily pace of trading.

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    Are Traders Over-Preparing for a Sell-Off?

    If you take an aggressive approach to VIX mean-reversion plays, the recent move is actionable

    by 9/17/2014 7:58 AM
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    I often mention that I use the CBOE Volatility Index (VIX) closing greater than 20% above its 10-day simple moving average (SMA) as a trigger point. I also use it as a proxy for declaring VIX overbought, which (to me) is bearish for volatility and bullish for the market on the theory that VIX tends to mean revert.

    But, it's important to always note that 20% is somewhat an arbitrary threshold. I personally use it because it's a nice round number and it gives a reasonable number of signals, maybe three or four per year, typically. Clearly, if you lower to 15% or 10% above the 10-day SMA, you'll get more signals, and 25% or 30% you'll get fewer. And, it's entirely possible either case suits you better (it's also entirely possible that you don't view VIX as a contra-tell, but that's a subject for another day).

    Anyway, my point is that VIX action relative to its moving average is best viewed as a continuum, rather than a series of hard-and-fast actionable signals. If you believe overbought VIX will mean-revert, then it's relatively better to go long the market/short volatility when VIX is 15% above its 10-day SMA than 10%, relatively better at 20% than 15%, etc.

    I bring this up thanks to a friend who asked me the other day how close VIX was to being overbought. Given that on the surface, absolutely nothing had happened in the market to that point, I figured VIX wouldn't say much. But, when I hit it up, it was around the low ebb of Monday's market decline, and VIX was 15% above the 10-day. If you take a more aggressive approach to VIX mean-reversion plays, that's actionable.

    And I have to admit, I was pretty surprised. Yes, the market had drifted a bit until Tuesday -- it was really a tiny drift. The peak close in SPDR S&P 500 ETF (SPY) was 200.50 on Sept. 3. The low close was Monday at 198.98. That was a whopping 0.75% drop over the course of nine trading days.

    That's barely more than a rounding error. Yet VIX made a real move, at least in percentage terms. It closed at 12.36 on Sept. 3, and 14.12 on Monday. That's about a 12.5% pop. On average, VIX moves about six times the pace of SPY (i.e. -- a 1% SPY loss would translate to about a 6% VIX pop). It's very variable, though. It's more of an exponential relationship than a linear one. That is, if SPY drops 2% today, VIX would likely lift way more than 12% -- probably something like 30%.

    But, a 0.75% move over the course of two weeks? That would generally translate to almost nothing in VIX. Yet we see a decent move and a decent-size stretch from its moving average.

    Subjectively, that was a bit of an overreaction to a nothing move. Maybe it's predicting we do see a more sizable sell-off at some point. But, another way to look at it is that traders/investors are over-preparing for the next sell-off, and will have some ammo ready to fade the move -- which often means the move won't happen.

    Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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    Stocks On the Move: Las Vegas Sands Corp., SinoCoking Coal and Coke Chem Ind, Inc., and Zillow Inc

    LVS, SCOK, and Z are moving sharply in Tuesday's trading

    by 9/16/2014 1:18 PM
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    Equity markets have surged higher in afternoon trading thanks to a boost in the energy sector. Drilling down on specific stocks, casino concern Las Vegas Sands Corp. (NYSE:LVS), China-based mining issue SinoCoking Coal and Coke Chem Ind, Inc. (NASDAQ:SCOK), and online real estate firm Zillow Inc (NASDAQ:Z) are all making notable moves today. Here's a quick roundup of how LVS, SCOK, and Z are performing on the charts so far.

    • LVS is sitting out this afternoon's broad-market rally, after Wells Fargo said it expects Macau gaming revenue for September to decline by a wider margin than initially forecast. At last check, shares of LVS were 1.9% lower at $60.98, after earlier tumbling to a fresh annual low of $59.52. Today's drop only highlights the equity's withstanding technical troubles, though, with the shares off nearly 31% from their five-year high of $88.28, tagged in early March. In spite of this, almost 79% of covering analysts maintain a "strong buy" rating toward the security, with not a single "sell" to be found. Should Las Vegas Sands Corp. continue to lose ground on the charts, an additional round of downgrades could apply further pressure to the shares.

    • Shares of SCOK are soaring today -- up 37.8% at $7.44 -- after a local Chinese government said it would provide the company with a pipeline distribution network. The news follows a freshly inked coal-conversion contract reported last Tuesday, which sent the stock 143% higher that day. Tallying its return from the start of September, shares of SCOK have now rallied almost 154%. In the options pits, speculators have shown a preference for puts over calls among contracts expiring in three months or less. Specifically, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.82 ranks in the 76th percentile of its annual range, indicating short-term traders have been more put-focused toward SinoCoking Coal and Coke Chem Ind, Inc. than usual.

    • Z has popped more than 6% today on no apparent news, with the equity last seen lingering near $133.44. Longer term, the security has tacked on 63% in 2014, yet two-thirds of analysts covering the stock maintain a tepid "hold" recommendation toward it. Plus, the consensus 12-month price target of $145.62 stands at a lukewarm 9.1% premium to current trading levels. Should any of these brokerage firms follow in the footsteps of Stephens -- which yesterday started Zillow Inc with an "overweight" rating and a $170 price target -- the equity could receive a fresh burst of buying power.

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