Schaeffer's Trading Floor Blog

Analyst Downgrades: Chesapeake Energy Corporation, Sarepta Therapeutics Inc, and Blue Nile Inc

Analysts downwardly revised their ratings on CHK, SRPT, and NILE

by 7/22/2014 9:17 AM
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Analysts are weighing in today on commodity concern Chesapeake Energy Corporation (NYSE:CHK), drug maker Sarepta Therapeutics Inc (NASDAQ:SRPT), and online jeweler Blue Nile Inc (NASDAQ:NILE). Here's a quick roundup of today's bearish brokerage notes.

  • Global Hunter Securities trimmed its price target on CHK to $34 from $38 this morning. The stock has tacked on more than 26% during the past year, but is now testing support atop its 10-month moving average. Although Chesapeake Energy Corporation tagged a multi-year peak of $29.92 earlier this month, most analysts are in the bearish camp. Just seven out of 32 brokerage firms consider CHK worthy of a "buy" or better rating. Ahead of the bell, CHK -- which closed at $26.76 on Monday -- is poised to shrug off today's downbeat note, with the stock headed 0.6% higher.

  • BofA-Merrill Lynch initiated coverage of SRPT with a tepid "neutral" rating. The stock is still treading water after its July 10 bear gap -- the result of disappointing data for its eteplirsen drug -- and finished at $21.57 on Monday. The security has lost more than half its value over the past year, and an extended retreat could trigger more negative analyst notes. The consensus 12-month price target of $38.08 represents expected upside of nearly 77% to Sarepta Therapeutics Inc's current price, and more than half the analysts covering the shares maintain "buy" or better opinions.

  • Finally, NILE was slapped with a pair of downgrades this morning, with both Wunderlich and William Blair revising their ratings to "market perform" from "outperform." The negative notes come as no surprise, as Blue Nile Inc has surrendered more than 42% in 2014, and touched a new annual low of $26.55 just last week. What's more, the shares could be vulnerable to additional downgrades and/or price-target reductions. Four of the nine analysts following NILE offer up "buy" or better endorsements, and the average 12-month price target of $37.88 represents expected upside of 39% from the stock's closing price of $27.21 on Monday. In pre-market action, NILE is pointed 2% lower.

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Analyst Upgrades: Chipotle Mexican Grill, Inc., Netflix, Inc., and Texas Instruments Incorporated

Analysts upwardly revised their ratings on CMG, NFLX, and TXN

by 7/22/2014 8:59 AM
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Analysts are weighing in today on fast-casual restaurateur Chipotle Mexican Grill, Inc. (NYSE:CMG), streaming video provider Netflix, Inc. (NASDAQ:NFLX), and semiconductor concern Texas Instruments Incorporated (NASDAQ:TXN), which all stepped into the earnings confessional last night. Here's a quick roundup of today's bullish brokerage notes.

  • CMG said second-quarter profit rose almost 26% to $3.50 per share, while revenue surged a year-over-year 29% to $1.05 billion, topping expectations. Furthermore, the company saw same-store sales rally 17.3%, as traffic increased in spite of higher menu prices, and lifted its forecast for current-quarter same-store sales growth. As such, Chipotle Mexican Grill, Inc. scored a bevy of upbeat analyst attention, with no fewer than 13 brokerage firms hiking their price targets. Among them were Barclays and Baird, which lifted their targets to $690 and $800, respectively. After closing at $589.93 on Monday, the shares of CMG are pointed more than 10% higher ahead of the bell, and could surge into record-high territory north of $650.

  • NFLX said its second-quarter profit more than doubled from the year-ago period, to $1.15 per share, as the number of global subscribers topped 50 million for the first time. Revenue rose to $1.34 billion from $1.07 billion. The results were roughly in line with expectations for a per-share profit of $1.16 on sales of $1.34 billion. On the analyst front, no fewer than 12 brokerage firms lifted their price targets on NFLX, including J.P. Morgan Securities, which hiked its outlook to $550 from $500. However, Netflix, Inc. shares have lost some steam in pre-market action, after the company increased its monthly rate by $1 for new subscribers. At last check, NFLX -- which settled Monday at $451.95 -- is pointed 1% lower.

  • Finally, TXN reported stronger-than-expected per-share earnings for the second quarter, and said revenue rose 8% to $3.3 billion -- in line with the Street's consensus estimate. In addition, Texas Instruments Incorporated hiked its third-quarter sales forecast, citing improving demand for chips in the automotive industry. As such, Jefferies and Deutsche Bank were among the handful of brokerage firms to upwardly revise their price targets on the stock, to $60 and $45, respectively. Nevertheless, the low end of the company's third-quarter outlook is well below the consensus estimate, and TXN is poised to drop 0.8% out of the gate, after settling at $49.17 on Monday.

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VQT: The Answer to Your Market Fears?

VQT offers an intriguing strategy, but one that can be easily replicated

by 7/22/2014 7:42 AM
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Whatever your opinion now, we can probably all agree that risk has increased.

So, what to do? Brendan Conway takes up the topic in Barron's (subscription required), and reminds me of an interesting ETF.

The $623 million Barclays S&P 500 Dynamic Veqtor ETN (VQT), for instance, uses a complex formula to shift money between stocks, cash, and volatility futures. It shone brightly in a rough 2011.

What is that complex formula?

VQT defaults to long SPDR S&P 500 ETF Trust (SPY), but reacts to pops in volatility by purchasing CBOE Volatility Index (VIX) products. And then, in the worst case, it sells everything and goes into cash. It's like having stops at different trigger points.

Sounds great, right? Well

The trouble here is trusting the engineering. Buyers sign on to a complex index in a product conceived after the financial crisis. That's a bigger problem than it first appears. Fund makers have strong incentives to sell you yesteryear's winners; investors' natural instinct is to hew to just those strategies. But that may not work out, argues Morningstar strategist Samuel Lee. Paradoxically, the very act of sifting through historical data for the perfect hedge increases the chance you've simply found a red herring, with no guarantee it'll work next time. "You have no way of telling how much this index was tweaked before launch," Lee says. "We're only talking about this because it worked before."

That hits the nail on the head, in my humble opinion.

You can recreate this whole concept yourself. The idea of buying volatility products AFTER the horse has left the barn sounds counterintuitive on the surface. But in reality, it makes more sense than a strategy that tries to buy VIX into volatility weakness. That's because investors rarely, if ever, factor in the true cost of all the bad volatility purchases before the one good one. Paying up when you actually need the protection and then selling at a probable loss when you find out you didn't need it sounds awful, but I can pretty much guarantee it costs less than, say, rolling out-of-the-money (OOTM) VIX calls over and over and over again. And it still sets you up with protection for that occasional instance where you really do need it.

So, to me, the issue is exactly as the highlighted paragraph states. Why trust the particular and rigid formula used by VQT as opposed to using your own eyes and ears and risk tolerance? Pretty much 100% of ETPs came to market with backtests that proved they worked. Unfortunately, nothing ever plays out exactly as it did in the past.

The performance picture of something like VQT is pretty straightforward. It's going to underperform in a generally up market, as it's going to blow money on ultimately unnecessary VIX products here and there. And it's going to lose less on market declines, thanks to buying volatility and then possibly switching to cash.

Thing is, though, you can pretty easily replicate these concepts. If you're an active trader/investor, you can just slap on the hedges yourself, when needed. And if you're a more passive investor, you just need to allocate a lower percentage into the market.

I do like the whole thought process behind VQT. It certainly beats the iPath S&P 500 VIX Short-Term Futures ETNs (VXX) of the world. It's just a question of why you need an ETF for something that's relatively easy to replicate on your own.

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


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Tech Earnings on Deck: ARM Holdings plc (ADR), Electronic Arts Inc., and Juniper Networks, Inc.

Taking a closer look at ARMH, EA, and JNPR ahead of their earnings results

by 7/21/2014 2:29 PM
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The thick of earnings season is upon us, and this week, a number of notable blue chips, as well as an onslaught of tech names, will be hitting the confessional. Representing technology firms on the earnings stage will be semiconductor concern ARM Holdings plc (ADR) (NASDAQ:ARMH), video game maker Electronic Arts Inc. (NASDAQ:EA), and network infrastructure operator Juniper Networks, Inc. (NYSE:JNPR). Here's a quick look at this trio of names as earnings approach.

  • ARMH has exceeded analysts' bottom-line estimates in each of the past eight quarters, resulting in an average single-session post-earnings gain of 3.3%. Ahead of tomorrow morning's event, Citigroup said the company could surprise to the upside with its second-quarter results, but the analysts expect challenges in the current quarter due to royalties. This skepticism on the part of Citigroup has had little impact on ARMH in today's session, with the shares up 1% to trade at $42.77. For tomorrow's results, analysts, on average, are calling for a second-quarter profit of 26 cents per-share for ARMH -- 3 pennies more than what the company earned last year.

  • EA is 0.3% higher today to linger near $38.49 -- and tagged a five-year high of $38.62 moments ago -- after Credit Suisse this morning raised its price target for the stock by $4 to $42. If past is prologue, the security could be poised to add significantly to these gains in the wake of tomorrow night's earnings report. Specifically, over the past eight quarters, EA has, on average, added 8.5% in the session subsequent to its report -- including a 21% surge in early May. What's more, additional price-target hikes could help the equity add to its already impressive 68% year-to-date gain. Currently, the stock's consensus 12-month price target of $37.24 stands at a discount to present trading levels. For Electronic Arts Inc.'s fiscal first quarter, analysts have forecast a per-share loss of 4 cents -- a 36-cent improvement over EA's year-ago results.

  • JNPR is bucking the broad-market trend lower today, after Barron's gave a positive outlook for the company's share price over the weekend. With less than two hours left in today's session, the stock was up 2.3% at $24.56. Looking ahead to tomorrow night's quarterly earnings report, the consensus estimate is for a per-share profit of 38 cents, which is 9 cents more than what Juniper Networks, Inc. earned one year ago. Over the past eight quarters, the company has matched or exceeded analysts' profit estimates each time, and another earnings win could prompt a round of upgrades from the brokerage bunch. At present, 60% of covering analysts maintain a "hold" or "sell" recommendation toward the stock.

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Stocks on the Move: E-Commerce China Dangdang Inc (ADR), Extreme Networks, Inc, and Steel Dynamics, Inc.

DANG, EXTR, and STLD are moving sharply in Monday's trading

by 7/21/2014 1:31 PM
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Heading into the final few hours of today's trading, three of the top market movers are Chinese Internet issue E-Commerce China Dangdang Inc (ADR) (NYSE:DANG), network infrastructure supplier Extreme Networks, Inc (NASDAQ:EXTR), and steel producer Steel Dynamics, Inc. (NASDAQ:STLD). Here's a quick roundup of how this trio of names is performing on the charts so far.

  • DANG has been making some big moves over the past two weeks, thanks to a couple of sharp bounces off its 50-day moving average. The equity is continuing this upward momentum today, up 2.2% to trade at $12.76. Year-to-date, the stock has rallied almost 34%, yet 62% of covering analysts maintain a "hold" or "sell" recommendation toward E-Commerce China Dangdang Inc (ADR). What's more, the consensus 12-month price target of $12.30 stands at a discount to present trading levels. Should DANG continue to make its way up the charts, a re-evaluation of ratings from the skeptical brokerage bunch could help fuel the security's fire.

  • EXTR has surged roughly 14% today, nearly filling in its earnings-induced bearish gap from early May. Today's burst of buying power comes after the company reported preliminary fiscal fourth-quarter earnings results this morning that were well above consensus estimates. At last check, the stock was trading at $4.97, but was still 51% below the average 12-month price target of $7.50. Elsewhere, all but one of the six covering analysts maintain a "buy" or "strong buy" recommendation toward EXTR, despite the stock's roughly 29% year-to-date deficit. Extreme Networks, Inc will unveil its full quarterly report after the market closes on Thursday, Aug. 14.

  • Similar to sector peer AK Steel Holding Corporation (NYSE:AKS), STLD is getting a boost today amid word that Russian steel company Severstal has sold its two North American plants to the domestic steel suppliers for a reported $2.33 billion. At last check, shares of STLD were up 6.9% at $19.87 -- easily toppling previous congestion in the $19.50 area, and earlier tagging a three-year peak of $20.10. Today's option players are responding in kind, scooping up the contracts at a rate 30 times the intraday average. A number of option bulls are targeting a move north of $21, with the stock's September 21 and November 21 calls apparently seeing buy-to-open activity. Elsewhere on the fundamental front, Steel Dynamics, Inc. (NASDAQ:STLD) will take its turn in the earnings confessional after tonight's close. After matching or exceeding analysts' bottom-line estimates in each of the past eight quarters, the stock has gone on to average a single-session post-earnings gain of 1.3%.

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