Schaeffer's Trading Floor Blog

Analyst Upgrades: Salesforce.com, inc., JetBlue Airways Corporation, and Williams-Sonoma, Inc.

Analysts upwardly revised their ratings on CRM, JBLU, and WSM

by 11/20/2014 9:22 AM
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Analysts are weighing in today on cloud concern Salesforce.com, inc. (NYSE:CRM), airline issue JetBlue Airways Corporation (NASDAQ:JBLU), and home furnishings specialist Williams-Sonoma, Inc. (NYSE:WSM). Here's a quick roundup of today's bullish brokerage notes on CRM, JBLU, and WSM.

  • CRM was met with a mixed bag of brokerage notes, after offering up lower-than-expected current-quarter and fiscal 2016 revenue outlooks. Both Canaccord Genuity and Pivotal Research followed in the recent footsteps of D.A. Davidson, and upped their respective price targets to $70 and $74 -- while underscoring their "buy" ratings. Wedbush, meanwhile, cut its price target to $58 from $61, while reiterating its "neutral" rating. Ahead of the bell, Salesforce.com, inc. is pointed 3% lower, which should please one group of traders. Specifically, short interest jumped nearly 5% over the last two reporting periods, and now accounts for a healthy 6.5% of the stock's available float. What's more, it would take eight sessions to cover these bearish bets, at CRM's average daily pace of trading. Last night, the stock closed at $61.02 -- 10.6% above its year-to-date breakeven line.

  • JBLU received a handful of bullish brokerage notes, after the company announced a number of income-adding strategies yesterday. Included in the bunch was an upwardly revised price target to $17 from $13 at Deutsche Bank, which also reiterated its "buy" rating, and an upgrade to "neutral" from "underperform" at Credit Suisse. Thanks to Wednesday's 4% pop, the stock is now sitting more than 55% higher in 2014. Plus, the equity is positioned to hit another multi-year high out of the gate, with the shares flirting with a 3% lead in pre-market trading. Should JetBlue Airways Corporation continue to make its way up the charts, an unwinding of skepticism could help propel the shares higher. At present, the majority of analysts covering the shares maintain a "hold" or "sell" suggestion. Additionally, one-fifth of the security's float is sold short, representing more than a week's worth of pent-up buying demand, at typical daily trading levels.

  • WSM is pointed 6% higher ahead of the bell, after the company's stronger-than-expected third-quarter earnings report was met with no fewer than eight price-target hikes. The most optimistic outlook came from SunTrust Robinson, which boosted its target price by $2 to $85 (and maintained its "buy" rating), representing expected upside of more than 22% to the stock's current perch at $69.42 -- and a move into uncharted territory. On the sentiment front, option traders were optimistic heading into last night's announcement. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), Williams-Sonoma, Inc.'s 50-day call/put volume ratio of 2.44 ranks in the 97th percentile of its annual range. Simply stated, calls have been bought to open over puts with more rapidity just 3% of the time within the past year.

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Are Options Underpricing the Probability of More Upside?

Maybe the VIX isn't the whole picture when it comes to volatility expectations

by 11/20/2014 8:28 AM
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Yesterday, we noted that the humans rarely "predict" that volatility will go lower. And that "prediction" makes some sense given that the markets themselves rarely predict lower volatility.

I used CBOE Volatility Index (VIX) premiums to realized volatility and VIX futures premium to VIX itself as examples. But there are more ways to gauge expectations out there. I bring you, SKEW -- courtesy of Chicago Board Options Exchange (CBOE):

CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, rise to higher levels as investors become more fearful of a "black swan" event -- an unexpected event of large magnitude and consequence. The value of SKEW increases with the expected tail risk of S&P 500 returns. If there were no tail risk expectations and concerns, SKEW would be close to 100.

The CBOE SKEW Index hit 146.08 on Sept. 19, 2014, its highest level since 1998.

The average daily closing levels for the CBOE SKEW Index were --

> 129.4 in 2014 (through November 17),

> 117.2 in the 24 years from 1990 through 2013.

SKEW compares the implied volatility of out-of-the-money puts to out-of-the-money calls. Thus a reading of 100 would mean the fear of a dip is about equal to the fear of a rip.

Spoiler Alert: SKEW doesn't dip below 100, though it would likely hover around there around a crash. It got as low as 110 in 2008.

It's interesting that SKEW has acted so well in 2014. Volatility as measured by VIX has remained very blah this year, save for the relatively brief February and October spikes. It's averaged about 14 -- coincidentally where we sit right now. SKEW, however, has had a veritable boon.

One way to look at it is that there's excessive fear of a downside "tail." But another is that there's very little "fear" of an upside pop. Mentally, I believe we look at this like the near-the-money options are "fair" and the out-of-the-money puts are on the high end -- ergo, the "tail" hedge. But what if instead we centered our universe on the "tail" hedge and called those options fair? That implies at-the-money options are cheap and out-of-the-money upside options are extremely cheap.

Viewing the whole picture from that angle suggests there's some serious under-pricing of the possibility of more upside. Maybe over-writing calls has become too easy a trade? The biggest risk of a buy-writing strategy is foregone upside (remember, you already own the stock). With realized volatility incredibly low, especially in rally phases, there's not much cost associated with writing and rolling calls. So why not keep doing it?

I'm not predicting any sort of rip. I'm just saying a low VIX/high SKEW combo suggests that options players, net-net, might be underpricing the probability of a strong rally from here.

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


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Analyst Update: Herbalife Ltd., Suncor Energy Inc. (USA), and Target Corporation

Analysts adjusted their ratings on HLF, SU, and TGT

by 11/19/2014 1:57 PM
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Analysts are weighing in today on nutritional supplements peddler Herbalife Ltd. (NYSE:HLF), oil producer Suncor Energy Inc. (USA) (NYSE:SU), and retailer Target Corporation (NYSE:TGT). Here's a quick look at today's brokerage notes on HLF, SU, and TGT.

  • HLF is up 0.7% this afternoon to trade at $38.60, after BTIG started coverage on the shares with a "buy" rating. Nevertheless, the stock is down nearly 51% on a year-to-date basis, and got crushed two weeks ago on a disappointing earnings report. Not surprisingly, pessimism is running high on Wall Street. For one, Herbalife Ltd.'s Schaeffer's put/call open interest ratio (SOIR) of 2.66 sits at the top of its annual range. For another, a brow-raising 46% of the stock's float is sold short, which represents more than 17 sessions' worth of pent-up buying power, at average daily trading levels.

  • SU has dropped 1.5% to churn near $34.17, as the market reacts negatively to the company's 2015 spending plan and production outlook. Moreover, the equity received a price-target cut to C$46 from C$47 at National Bank Financial -- though the firm reiterated its "outperform" rating. Taking a step back, shares of Suncor Energy Inc. (USA) are down 2.5% in 2014, and have been pressured lower in recent weeks by their 10-week moving average. Despite this bleak technical picture, the brokerage crowd remains enamored with SU. Nine out of 11 covering analysts have doled out "buy" or better opinions, versus two "holds" and not a single "sell" recommendation. Plus, the consensus 12-month price target of $48.25 stands at a 41.2% premium to the current share price.

  • TGT has rallied 6.5% this afternoon -- hitting an annual high of $73.08 earlier -- and at last check was perched at $71.90. The big move is the result of stronger-than-expected third-quarter results, as well as a price-target lift to $59 from $55 at Deutsche Bank. Taking a step back, the security has been on fire recently, with the shares up 16.3% month-to-date. That said, additional bullish brokerage notes could be forthcoming. Fourteen out of the 20 analysts covering Target Corporation have given it a "hold" or worse rating, and the stock's consensus 12-month price target of $61.04 represents a discount to current trading levels. In other words, a round of upgrades and/or price-target hikes could result in tailwinds for TGT.

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Stocks On the Move: La-Z-Boy Incorporated, Staples, Inc., and Stage Stores Inc

LZB, SPLS, and SSI are moving sharply in Wednesday's trading

by 11/19/2014 11:44 AM
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Around midday, three of the top market movers are recliner issue La-Z-Boy Incorporated (NYSE:LZB), office supplies seller Staples, Inc. (NASDAQ:SPLS), and apparel retailer Stage Stores Inc (NYSE:SSI). Here's a quick roundup of how LZB, SPLS, and SSI are performing on the charts so far.

  • LZB has spiked 7.4% to hover around $24.25, in the wake of a fiscal second-quarter earnings beat and increased dividend. Nevertheless, the shares remain nearly 22% south of breakeven on a year-to-date basis. On the Street, the brokerage bunch is bullish toward La-Z-Boy Incorporated. All five analysts covering the stock have assigned it a "buy" or better rating, while LZB's consensus 12-month price target of $28.67 stands at an 18.2% premium to current trading levels.

  • SPLS is in rally mode today, up 9.3% to trade at $13.94 -- thanks to better-than-expected quarterly earnings. From a wider perspective, however, the shares have dropped more than 12% since the beginning of the calendar year. Unlike LZB, Staples, Inc. has drawn the bearish ire of the brokerage crowd. In fact, all 14 analysts tracking SPLS have doled out "hold" or worse recommendations. Plus, the equity's consensus 12-month price target of $11.48 represents a discount to the current share price. Should SPLS' post-earnings momentum continue, a round of upgrades and/or price-target hikes could provide tailwinds. What's more, the stock could benefit from short-covering activity, as 11.7% of SPLS' float is dedicated to short interest -- an amount that would take 12.3 sessions to buy back, at typical daily trading volumes.

  • SSI has rallied nearly 20% at midday, due to a narrower-than-anticipated third-quarter loss. At last check, the stock was sitting at $18.81 -- still 15.3% below the year-to-date flat line. Regardless, today's surge in Stage Stores Inc shares is likely music to the ears of short-term options traders. The security's Schaeffer's put/call open interest ratio (SOIR) of 0.23 indicates call open interest more than quadruples put open interest, among options set to expire in the next three months. What's more, this SOIR is lower than 86% of all readings taken in the last year, suggesting an unusually strong bias toward short-term calls over puts.

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Analyst Downgrades: Biogen Idec Inc, Transocean LTD, and DreamWorks Animation SKG, Inc.

Analysts downwardly revised their ratings on BIIB, RIG, and DWA

by 11/19/2014 9:41 AM
Stocks quoted in this article:

Analysts are weighing in on biopharmaceutical firm Biogen Idec Inc (NASDAQ:BIIB), oil-and-gas issue Transocean LTD (NYSE:RIG), and entertainment name DreamWorks Animation SKG, Inc. (NASDAQ:DWA). Here's a quick roundup of today's bearish brokerage notes on BIIB, RIG, and DWA.

  • For the second time in a week, BIIB was hit with a bearish brokerage note; this time, from Credit Suisse, which cut its price target by $25 to $400, while reiterating its "outperform" rating. On the charts, the shares are up 9% year-to-date to trade at $304.77, and are currently testing support atop their 60-week moving average -- a trendline that's ushered BIIB higher for more than four years. Option traders have been encouraged by the equity's long-term uptrend, as evidenced by BIIB's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 1.23, which ranks in the bullishly skewed 73rd percentile of its annual range. This optimism is echoed outside of the options pits, as well, where just 1.1% of the stock's float is sold short.

  • Evercore ISI cut its price target on RIG to $23 from $24 and underscored its "sell" rating, following the company's fleet update. This bearish positioning isn't surprising, considering RIG has lost almost half its value in 2014 to churn near $25.53, and today hit a fresh 10-year low of $25.42 out of the gate. What's more, it's a sentiment shared in all corners of the Street. In the options arena, for example, RIG's 50-day ISE/CBOE/PHLX put/call volume ratio of 2.13 ranks higher than 95% of similar readings taken in the past year, meaning puts have been bought to open over calls at a near-annual-high clip in recent months. Elsewhere, one-quarter of Transocean LTD's available float is sold short, and all 16 analysts covering the shares maintain a "hold" or "strong sell" suggestion.

  • It's been a volatile two weeks for DWA, which rallied in the wake of acquisition rumors, only to erase all of those gains once the proposed deal was taken off the table. Against this backdrop, BofA-Merrill Lynch reinstated coverage on the shares with a "neutral" rating, echoing the general consensus seen among the brokerage bunch. Option traders, meanwhile, have been initiating long calls over puts at a faster-than-usual pace during the past 10 weeks, per DWA's 50-day ISE/CBOE/PHLX call/put volume ratio of 1.64, which ranks higher than 67% of similar readings taken in the past year. With 13.6% of the stock's float sold short, though, a portion of this call buying may have been at the hands of short sellers hedging against an unexpected surge. On Tuesday, DreamWorks Animation SKG, Inc. closed at $22.48, 36.7% below its year-to-date breakeven line.

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