Schaeffer's Trading Floor Blog

Buzz Stocks: Alibaba Group Holding Limited, Amazon.com, Inc., and McDonald's Corporation

Today's stocks to watch in the news include Alibaba Group Holding Ltd (BABA), Amazon.com, Inc. (AMZN), and McDonald's Corporation (MCD)

by 1/29/2015 9:12 AM
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Futures are signaling a higher start, as traders digest the latest raft of earnings reports. Meanwhile, among specific stocks in focus are e-commerce concerns Alibaba Group Holding Ltd (NYSE:BABA) and Amazon.com, Inc. (NASDAQ:AMZN), as well as fast food giant McDonald's Corporation (NYSE:MCD).

  • BABA is bracing for an 8% drop out of the gate, after the company reported lower-than-expected revenue for the fiscal third quarter. It's already been a rough week for Alibaba Group Holding Ltd, with the stock off 4.5% since last Friday's close to trade at $98.45, following a handful of fundamental developments. A continued slide could spark a round of downgrades and/or price-target cuts. Currently, all 22 analysts covering the shares maintain a "buy" or better rating, while the average 12-month price target of $120.31 stands in territory yet to be charted by the Wall Street freshman.

  • Ahead of tonight's quarterly earnings report, AMZN's cloud computing business unit unveiled a new corporate email and scheduling service, WorkMail, which will be launched in the second quarter. On the charts, the stock has been a long-term laggard, and is down 20.9% year-over-year to trade at $303.91. As such, short-term speculators have shown a preference for puts over calls, as evidenced by the equity's Schaeffer's put/call open interest ratio (SOIR) of 1.55, which ranks in the 97th annual percentile. With earnings on the horizon, those purchasing premium on AMZN's front-month options are willing to pay a pretty penny. In fact, the security's Schaeffer's Volatility Index (SVI) of 51% rests higher than all other readings taken in the past year, meaning premium is relatively expensive at the moment.

  • MCD announced today that CEO Don Thompson will step down, and be replaced by the firm's current chief brand officer, Steve Easterbrook, effective March 1. The news follows a dismal showing by MCD both on and off the charts, with the equity tumbling 1.5% last week in the wake of an uninspiring fourth-quarter earnings report. Longer term, shares of MCD have surrendered more than 14% since topping out at a record high of $103.78 in mid-May, and closed last night at $88.78. Options traders have kept the faith, though, and at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), MCD's 50-day call/put volume ratio of 3.84 ranks just 7 percentage points from a 52-week peak. Should the shares continue to struggle, an unwinding of these bullish bets could translate into headwinds for McDonald's Corporation.

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Lessons in Probability: A Post-Mortem on Apple Inc. (AAPL)

Following the money worked -- this time -- for Apple Inc. (AAPL)

by 1/29/2015 8:37 AM
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In the middle of our semi-daily panics about Europe, someone decided to throw in an earnings season. When I think of it, I try to tweet out higher-profile earnings estimates. That is, estimates of the magnitude of the earnings move as suggested by the options volatility curve as calculated by ThinkorSwim.

On Tuesday, for example, I noted that Apple Inc. (NASDAQ:AAPL) options priced in a 6.3% move. All options across the board get bid up in volatility terms ahead of earnings in a stock like AAPL. But the bid-up is larger in options that are closer to expiration. So that estimate is based on the degree of the bid-up relative to the bid-up in further-out options. It's important to note that it's an estimate. The whole volatility board may react more or less to the number.

So what does that number tell us? In theory, it gives us the point where both volatility-long and volatility-short strategies break even. Obviously not everyone in the pool has the same experience, because real-life positions are always more nuanced. But it's a good approximation to an equilibrium move. It's almost like a pin at expiration. If the stock is near that level, there's neither extreme pressure from trapped options shorts nor options owners seeking to offset the volatility drop that's about to happen. Get away from that level and you could see a move compound upon itself.

And it's important to remember that the estimated move is akin to a standard deviation. As a whole, roughly two-thirds of names will move within their earnings estimates, and one-third will make larger moves. It's a dynamic process. If lots of names move beyond their estimates, then volatility will almost certainly rise in the next batch of names, and will keep rising until we hit some sort of equilibrium.

What does this estimate not tell us? Direction. That's a different sort of analysis. I tend to default to "the present trend continues." If a name is trending, I expect it to react consistently with that trend. I would use options volumes and open interest as a bit of a contrarian tell, but only if it tells a different story to the overall trend.

Take AAPL again, for example. The trend suggested up. If the world wanted to play earnings with puts, either to hedge gains or speculate on a miss, I would have found that a very bullish combo. But alas, that wasn't the case, the world wanted them some upside (click picture to enlarge).

Open Interest on AAPL options with 30 days or less to expire

Following the money did work this go-around, but I'd be careful using that as a regular strategy. Heavy volume can become a magnet towards a strike, as in this case, but it can also lead to a big reaction in reverse if the masses are leaning one way and the move goes against them.

All in all, there's really no simplistic and magical prediction system that tells you where the stock is about to go. If there was one, everyone would use it and it would stop working anyway. It's all about probability. The magnitude estimate tells you the market expectations. Volume and open interest analysis tells you how investors are playing it. And the stock chart itself gives you a sense of trends and support resistance levels. Throw them all together, consider the overall market backdrop, and you can make some educated guesses.

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


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Analyst Update: Freeport-McMoRan Inc., Freescale Semiconductor, Ltd., and Southwest Airlines Co.

Analysts adjusted their ratings on Freeport-McMoRan Inc (FCX), Freescale Semiconductor Ltd (FSL), and Southwest Airlines Co (LUV)

by 1/28/2015 1:42 PM
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Analysts are weighing in today on mining magnate Freeport-McMoRan Inc (NYSE:FCX), semiconductor specialist Freescale Semiconductor Ltd (NYSE:FSL), and discount airline Southwest Airlines Co (NYSE:LUV). Here's a quick look at today's brokerage notes on FCX, FSL, and LUV.

  • Shares of FCX are continuing to struggle -- down 3% today to $17.83, after touching a five year low of $17.65. The stock received price target cuts from no fewer than seven brokerage firms after reporting a drastic fourth-quarter loss last night (subscription required). Brean and BB&T both downgraded Freeport McMoRan Inc to "hold" from "buy," while Nomura and BMO both slashed their price targets by $5, to $30 and $23, respectively. Not surprisingly, sentiment in the options pits is nearing a bearish climax, with FCX's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.09 reading higher than 97% of all similar readings taken over the past year. Looking elsewhere, there's plenty of room for additional downgrades, as 75% of covering analysts rating the stock a "buy" or better, with no "sell" recommendations to be found.

  • On the other hand, FSL is enjoying an 18.4% gain this afternoon to flirt with $31.20 -- and earlier notched a record high of $33.54 -- after releasing an impressive fourth-quarter earnings report last night. In response, at least 12 brokerage firms have raised their price targets on the stock, including a $10 hike from Needham to $45, which also raised its rating to "strong buy" from "buy," and an $8 increase from J.P. Morgan Securities to $29, which reiterated its "neutral" rating. However, Freescale Semiconductor Ltd bears could be spooked, with over 19% of the equity's available float sold short, which would take eight sessions for short sellers to cover, at average daily trading volumes. What's more, FSL's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.39 sits in the 67th percentile of its annual range, showing a preference for puts over calls over the past two weeks. Traders were paying above-average prices for their short-term bets ahead of earnings, with FSL's Schaeffer's Volatility Index (SVI) of 57% reading higher than 65% of all similar annual readings.

  • LUV has added 2.4% to trade at $46.98, and reached an all-time high of $47.08, after Credit Suisse raised its price target to $62 from $48 and upgraded its rating to "outperform" from "neutral." The upbeat attention is well-deserved, as LUV has advanced a staggering 128% over the past 52 weeks. However, sentiment in Southwest Airlines Co's options pits is still bearish, with its 50-day ISE/CBOE/PHLX put/call volume ratio of 0.31 reading higher than four-fifths of all comparable annual readings. An unwinding of pessimism amongst options traders could result in additional tailwinds for the soaring stock.

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Analyst Upgrades: Apple Inc., Juniper Networks, Inc., and Electronic Arts Inc

Analysts upwardly revised their ratings on Apple Inc. (AAPL), Juniper Networks, Inc. (JNPR), and Electronic Arts Inc. (EA)

by 1/28/2015 9:52 AM
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Analysts are weighing in today on tech titan Apple Inc. (NASDAQ:AAPL), network infrastructure specialist Juniper Networks, Inc. (NYSE:JNPR), and video game guru Electronic Arts Inc. (NASDAQ:EA). Here's a quick roundup of today's bullish brokerage notes on AAPL, JNPR, and EA.

  • AAPL has popped 8.3% out of the gate, after the company posted better-than-expected fiscal first-quarter earnings thanks to record iPhone sales. Wall Street has taken kindly to the news, with Apple Inc. receiving no fewer than 13 price-target hikes, including one to $160 from $143 at Cantor, and one to $130 from $125 at UBS, with both brokerage firms underscoring their "buy" ratings. While AAPL has been a long-term technical standout -- and is up 50.8% year-over-year -- the shares had more recently been lingering in the $106-to-$114 range, since topping out at an all-time peak of $119.75 in late November. Options traders have kept the faith, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 50-day call/put volume ratio of 2.39 ranks in the bullishly skewed 71st annual percentile.

  • JNPR received a bevy of bullish brokerage notes, as aggressive cost-cutting measures helped the company report stronger-than-forecast fourth-quarter earnings. Included in the bunch was a price-target hike to $25 from $22 at J.P. Morgan Securities, as well as an upwardly revised price target by $2 to $27 at Barclays, with both brokerage firms reiterating their "overweight" recommendations. On the charts, JNPR is up 6.7% at $23.30, and is poised to topple its 200-day moving average for the first time since July. However, the stock is still off 18% from its mid-February high of $28.39, and sentiment is tilted toward the skeptical side. Two-thirds of covering analysts maintain a tepid "hold" rating on the shares, while the average 12-month price target of $22.72 stands at a discount to JNPR's current price. Elsewhere, Juniper Networks, Inc.'s 10-day ISE/CBOE/PHLX put/call volume ratio of 1.76 ranks in the 88th annual percentile.

  • EA is up 9.5% at the open to trade at $53.02 -- and hit a six-year high of $53.06 -- after the company's better-than-expected fiscal third-quarter earnings report was met with a round of positive analyst notes. Benchmark, for example, boosted its price target by $7.30 to $61.68 -- territory not charted since November 2005 -- while Brean Capital raised its target price by $3 to $57. Heading into today's session, the stock was up a modest 3% on the year, yet short-term speculators have shown a distinct preference for puts over calls. In fact, Electronic Arts Inc.'s Schaeffer's put/call open interest ratio (SOIR) of 1.72 ranks just 1 percentage point from a 52-week peak.

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Analyst Downgrades: AK Steel Holding Corporation, Open Text Corporation, and VMware, Inc.

Analysts downwardly revised their ratings on AK Steel Holding Corporation (AKS), Open Text Corporation (USA) (OTEX), and VMware, Inc. (VMW)

by 1/28/2015 9:29 AM
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Analysts are weighing in today on metal manufacturer AK Steel Holding Corporation (NYSE:AKS), software developer Open Text Corporation (USA) (NASDAQ:OTEX), and virtualization specialist VMware, Inc. (NYSE:VMW). Here's a quick roundup of today's bearish brokerage notes on AKS, OTEX, and VMW.

  • AKS reported better-than-expected fourth-quarter earnings yesterday, but was nonetheless hit with a pair of price-target cuts from BMO (to $5) and Jefferies (to $4.75), with both firms reiterating the equivalent of a "hold" rating. Ahead of the bell, the shares are sitting nearly 3% higher, poised to extend yesterday's advance. Longer term, this represents a change of pace for AKS, considering the stock has shed more than two-fifths of its value in the last year to land at $4.25. If AK Steel Holding Corporation starts to make some headway on the charts, there's plenty of sideline cash to fuel a run higher. Specifically, 26.5% of AKS' float is sold short, which would take one week to buy back, at its typical daily trading levels.

  • OTEX issued mostly disappointing fiscal second-quarter results last night -- highlighted by weaker-than-anticipated sales. The brokerage bunch responded with a trio of price-target reductions, from BMO (to $57), Credit Suisse (to $60), and National Bank Financial (to $60), with the latter pair downgrading the shares to the equivalent of a "hold" rating. However, Susquehanna boosted its price target on Open Text Corporation by $2 to $52. In electronic trading, the stock is sitting 5.5% below breakeven, threatening to take it south of year-to-date breakeven. Longer term, however, the shares have rallied more than 21% year-over-year to perch at $59.59. This technical tenacity has prompted a rush of bullish options betting on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Across those exchanges, OTEX's 50-day call/put volume ratio of 2.33 ranks in the 95th annual percentile.

  • After issuing lackluster guidance, VMW was hit with no fewer than 10 price-target cuts -- the severest of which came from Cantor, which lowered its target to $82 from $88. On the flip side, Piper Jaffray boosted its price target by $5 to $74, but maintained its "underweight" opinion. It's been a rough year for VMware, Inc., which has dropped 15% in the last 12 months to rest at $80.61. Understandably, options traders are in the bears' corner, per VMW's 50-day ISE/CBOE/PHLX put/call volume ratio of 1.08 -- which sits just 1 percentage point from a 52-week peak. Ahead of the open, the stock is down 2.9%.

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