Schaeffer's Trading Floor Blog

Analyst Downgrades: DreamWorks Animation SKG, Inc., Real Goods Solar, Inc., and Youku Tudou Inc (ADR)

Analysts downwardly revised their ratings on DWA, RGSE, and YOKU

by 8/20/2014 9:22 AM
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Analysts are weighing in today on film firm DreamWorks Animation SKG, Inc. (NASDAQ:DWA), alternative energy concern Real Goods Solar, Inc. (NASDAQ:RGSE), and China-based Internet issue Youku Tudou Inc (ADR) (NYSE:YOKU). Here's a quick roundup of today's bearish brokerage notes on DWA, RGSE, and YOKU.

  • Janney cut its fair value target on DWA to $27 from $29 this morning, but maintained its "buy" rating on the stock. The shares have advanced 6.4% so far this week, settling Tuesday at $21.93, after DreamWorks Animation SKG, Inc. named a new chief financial officer. However, the security has run into a wall in the form of its 10-week moving average, which -- along with its 20-week cohort -- has ushered DWA 38.2% lower in 2014. Against this backdrop, it's no surprise to find most analysts in the bears' corner, as DWA boasts just one "strong buy" opinion, compared to six "holds" and two "sell" or worse ratings.

  • RGSE is bracing for a 15% plunge out of the gate, as speculators and analysts pan the company's steeper-than-expected per-share loss for the second quarter. Canaccord Genuity trimmed its price target by $1 to $3, and Cowen and Company reduced its price target to $2.50 from $2.60. Roth Capital made the most dramatic move, slashing its price target to $1.85 from $6, and downgrading RGSE to "neutral" from "buy." On the charts, Real Goods Solar, Inc. has surrendered 26.5% in 2014, and finished at $2.22 on Tuesday.

  • Finally, YOKU -- which closed at $21.52 on Tuesday -- is headed for a 7% drop at the open, after the firm reported weaker-than-expected second-quarter earnings, and offered lackluster current-quarter sales guidance. As such, Brean Capital reduced its price target on the shares to $24 from $27, but maintained a "buy" recommendation. More negative analyst notes could be on the way for Youku Tudou Inc (ADR), as four out of seven brokerage firms maintain "strong buy" opinions. A round of downgrades could exacerbate YOKU's year-to-date loss of nearly 29%.

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Futures are little changed this morning, as traders await this afternoon's release of the minutes from the latest Federal Open Market Committee (FOMC) meeting. In company news, here are some names to watch today.

  • Hertz Global Holdings, Inc. (NYSE:HTZ) is down nearly 13% ahead of the bell, after the car rental company withdrew its fiscal 2014 forecast. Citing this year's glut of auto recalls and an internal audit, HTZ projected earnings to arrive "well below" its previous estimate. (Bloomberg)

  • In the wake of its second-quarter earnings results, PetSmart, Inc. (NASDAQ:PETM) said it could potentially put itself up on the block as part of its larger plan to explore strategic alternatives. The retailer has been pressured lately by activist investor Jana Partners -- which owns a 10% stake in PETM -- has been pushing the company to put itself up for sale. (Reuters)

  • Following an 18-month investigation, Macy's, Inc. (NYSE:M) has agreed to pay a $650,000 fine to settle a racial bias investigation. The company was accused of increasing its surveillance on minority shoppers at its flagship store in Manhattan. In response to the settlement, New York Attorney General Eric T. Schneiderman said, "This agreement will help ensure that no one is unfairly singled out as a suspected criminal when they shop in New York." (The New York Times)

  • Amicus Therapeutics, Inc. (NASDAQ:FOLD) said that its treatment for Fabry disease -- an inherited disorder that creates a buildup of fat in the body's cells -- met its primary goals in a late-stage trial. The company said it will now take steps to gain regulatory approval for migalastat in both the U.S. and Europe. (MarketWatch)

  • AT&T Inc. (NYSE:T) is taking its ultra-fast Internet service to Cupertino, California -- home to tech titan Apple Inc. (NASDAQ:APPL). The city will be the first in the state to receive the T's GigaPower fiber optic broadband service, with hopes for strong demand from the tech-savvy customer base. Looking ahead, the company said it expects to roll out the service in other U.S. cities, including Houston. (CNET)

  • Former Microsoft Corporation (NASDAQ:MSFT) CEO Steve Ballmer has officially resigned from the company's board of directors. Ballmer spent more than 30 years being actively involved in MSFT, and still remains the firm's top individual stakeholder. (Bloomberg)

  • A number of retailers reported earnings, including Lowe's Companies, Inc. (NYSE:LOW), Staples, Inc. (NASDAQ:SPLS), Target Corporation (NYSE:TGT), and American Eagle Outfitters (NYSE:AEO). (CNBC; MarketWatch; USA Today)

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Analyst Upgrades: Dunkin Brands Group Inc, Panera Bread Co, and JetBlue Airways Corporation

Analysts upwardly revised their ratings on DNKN, PNRA, and JBLU

by 8/20/2014 8:51 AM
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Analysts are weighing in today on doughnut titan Dunkin Brands Group Inc (NASDAQ:DNKN), fast-casual chain Panera Bread Co (NASDAQ:PNRA), and airline issue JetBlue Airways Corporation (NASDAQ:JBLU). Here's a quick roundup of today's bullish brokerage notes on DNKN, PNRA, and JBLU.

  • DNKN is pointed modestly higher ahead of the bell, after Barclays upgraded the stock to "overweight" from "equal weight" and issued a $51 price target -- a premium of 15.8% to the equity's current perch at $44.05. The shares of Dunkin Brands Group Inc are down 8.6% year-to-date, and are struggling to topple their 10-week moving average, which has contained most of the stock's rebound attempts since late March. Meanwhile, option buyers are betting on more downside for DNKN, as the stock's 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits at an annual peak of 2.74.

  • Barclays also weighed in on PNRA, upping its opinion to "overweight" from "equal weight" and offering a $175 price target -- representing expected upside of 15.3% to the security's current price of $151.74. PNRA has shed 14.1% in 2014, but is on pace to end the week atop its 10-week trendline for the first time since mid-March. As with DNKN, Panera Bread Co's option traders are skeptical, as the stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.95 sits just 7 percentage points from a 12-month high. Likewise, the equity's Schaeffer's put/call open interest ratio (SOIR) stands at an annual peak of 2.28, indicating that short-term options players haven't been more put-heavy during the past year.

  • Finally, JBLU -- which settled at $12.33 after touching a seven-year peak of $12.42 on Tuesday -- is set to open 1.2% higher, thanks to an upgrade to "outperform" from "market perform" at Cowen. The analysts also hiked their price target on the stock by 50% to $15. The shares of JetBlue Airways Corporation have tacked on more than 15% so far in August, as airline stocks ride a wave of lower crude prices. Nevertheless, six out of 10 brokerage firms maintain "hold" or worse opinions on JBLU, and short interest represents nearly eight sessions' worth of pent-up buying demand, at the stock's average pace of trading. Additional upgrades or a short-covering rally could propel JBLU even higher.

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Trading VIX: The Devil's In the Details

Just because the VIX is low, doesn't mean it's time to buy

by 8/20/2014 7:58 AM
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I've asked a recurring question in these pages over the years: Why do CBOE Volatility Index (VIX) futures always trade in contango?

VIX is a mean-reverting asset. The long-term trend is a flat line. It has its up regimes and down regimes, but at the end of the day, it's not a stock with earnings that grow over time. It's a statistic. Yet, we always see traders anticipate it will lift -- or so it seems.

Volatility Made Simple posts a chart that shows the percentage of days near-month VIX futures are "contangoed," broken down into each absolute VIX level.

They look at whether near-month VIX is in contango (higher than) VIX itself, and whether VIX second month is higher than VIX first month. They go back to March 4, when VIX futures began trading.

And basically, if VIX itself is under 15, there's a near 100% chance that near-month VIX futures are trading at a premium. And there's at least an 80% chance that VIX second month is higher than first month.

In other words, when VIX is "low," VIX futures price in that it's going higher.

Does that make any sense as a permanent pricing structure?

Well, I looked at the numbers, and it really doesn't.

Between the beginning of March 2004 and July 15 of this year, there were 965 trading days where VIX closed under 15. I counted 537 instances when VIX closed higher one calendar month later, 55.65% of the time.

So, in a vacuum, it is right to "guess" that VIX will be higher.

Alas, it's not that simple. That assumes it's simply a binary bet and someone offered you 50-50 odds. But in the real trading world, VIX futures aren't just trading a penny over, they're trading at premiums that can range upwards of $1 or $1.50. So, not only do you need to win on the trade, you need to win by a fair amount.

It's tough to pick an exact number. But, a 10% lift is roughly equal to the $1-$1.50 lift VIX would generally need to get to the price of a one-month future. And even when VIX is under 15, it only lifted that much about 35% of the time.

On the other hand, the risk/reward picture isn't in perfect symmetry. Common sense says you risk more shorting a VIX future at, say, 16, then you do buying it. So, a buy-and-hold for a one-month strategy doesn't necessarily have to work 50% of the time for it to be profitable. If, say, you bought VIX and won the trade 35% of the time, and won an average of $2, while on the other 65% you lost $1, the trade has a modest positive expected gain. I doubt those are the real numbers, it's just a concept.

So, I went out a little more and looked at how often VIX saw 20% gains month-over-month. And that happened 242 times, almost exactly 25%. It does suggest that most of the time it gained at least 10%, it kept going a bit further.

The devil's always going to be in the details, but the numbers suggest that buying near-ish-month VIX futures at a typical premium to cash is a losing trade about two-thirds of the time. But, it's possibly not a terrible trade when viewed through an expected-gains lens. I do suspect it's a loser, though, and I certainly don't see numbers that suggest always pricing in a VIX rally makes any sort of sense.

And remember, this is all "low VIX" data, the time when it feels like everyone looks to "buy" VIX.

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


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Options Check-Up: Salesforce.com, inc., Dollar Tree, Inc., and GT Advanced Technologies Inc

Analyzing recent option activity on CRM, DLTR, and GTAT

by 8/20/2014 7:40 AM
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Among the stocks attracting attention from options traders lately are cloud specialist Salesforce.com, inc. (NYSE:CRM), discount retailer Dollar Tree, Inc. (NASDAQ:DLTR), and LED specialist GT Advanced Technologies Inc (NASDAQ:GTAT). Below, we'll break down how option buyers are positioning themselves, and how much speculators are willing to pay for their bets on CRM, DLTR, and GTAT.

  • CRM is slated to report its fiscal second-quarter earnings results after Thursday's close, and in the two weeks leading up to the scheduled event, speculators at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 118 puts for each 100 calls. Meanwhile, the resultant put/call volume ratio of 1.18 ranks in the 92nd percentile of its annual range, meaning puts have been bought to open over calls with more rapidity just 8% of the time within the past year. Those looking to place front-month bets on CRM are currently able to do so at a relative bargain, per the equity's Schaeffer's Volatility Index (SVI) of 35%, which ranks lower than 61% of similar readings taken over the last 12 months. On Tuesday, CRM closed at $54.96 -- just fractions of a point below its year-to-date breakeven mark.

  • Also taking its turn at the earnings plate on Thursday is DLTR, which unveils its second-quarter results ahead of the opening bell. According to the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 8.01 -- which ranks in the 96th annual percentile -- option traders have rarely been as bullish toward DLTR as they are now. Front-month options are pricing in average volatility expectations for the equity, as evidenced by Dollar Tree, Inc.'s SVI of 26%, which ranks in the middling 46th percentile of its annual range. On the charts, outside of a late-July M&A-related surge, DLTR has spent the majority of the past few months churning between $54 and $56.50, and finished Tuesday's session at $54.71.

  • GTAT has been a technical powerhouse in 2014, with the shares more than doubling in value on a year-to-date basis. What's more, the stock is maintaining its title of being a strong outperformer in August -- up nearly 33% month-to-date to trade at $18.40. At the ISE, CBOE, and PHLX, though, the stock's 10-day put/call volume ratio of 0.94 ranks just 4 percentage points from a bearish peak. In light of the equity's upward momentum, a portion of this put buying could be protective in nature. Regardless of the reason, now appears to be an opportune time to place bets on GT Advanced Technologies Inc's near-term trajectory. According to the equity's Schaeffer's Volatility Scorecard (SVS) reading of 87, the stock tends to make outsized moves relative to what the options market has priced in.

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