Today's column includes the latest quarter results from Microsoft Corp. (MSFT), Broadcom Corp. (BRCM), and Netflix Inc. (NFLX), while Martha Stewart Living Omnimedia Inc. (MSO) was graced with an upgrade. Each day, Options Edge focuses on the hot stocks in the news and gives you a unique insight into each stock's sentiment backdrop. Our time-tested contrarian approach centers on options, and gives you the trading tools to approach the day with a much-needed edge over the investing herd.
Broadcom Corp.
In earnings news, Broadcom Corp. (BRCM: sentiment, chart, options) announced after the close on Thursday that its third-quarter profit came in at $84.6 million, or 16 cents a share, compared with a profit of $164.9 million, or 31 cents a share, for the year-earlier period. Revenue was $1.25 billion, down from $1.3 billion for the same period last year. Adjusted income would have been 40 cents a share. Analysts had expected the chip maker to report a profit of 33 cents a share, on revenue of $1.16 billion. For the current quarter, the company said it expects revenue to be flat from the third quarter.
BRCM has gapped more than 6% lower in early trading this morning following the earnings report, as traders had been hoping for a stronger fourth-quarter outlook. The shares remain up more than 75% since the start of the year and are holding short-term support at the 28.50 level.
Ahead of last night's earnings report, some traders rushed to add last-minute bearish bets on BRCM. The International Securities Exchange (ISE) reported that 2.3 puts have been purchased to open for every one call purchased during the past 10 trading sessions. This ratio of puts to calls is higher than 70% of all those taken during the past year.
Martha Stewart Living Omnimedia Inc.
The shares of Martha Stewart Living Omnimedia (MSO: sentiment, chart, options) are trading higher this morning after analysts at JPMorgan lifted their rating on the stock from "underweight" to "neutral," citing the stock's recent pullback. The move reversed a recent downgrade of the stock by JPMorgan, issued on Sept. 16.
"While we still think valuation is full, we see little room for much incremental downside given the recent movement," the analysts wrote in a note to clients. There's still room for more upgrades as Zacks reports that only one of the of five analysts following MSO rate it a "buy."
The shares have jumped nearly 5% higher this morning, leaping above resistance at their declining 20-day moving average. The stock has not logged a daily close above this short-term trendline since Sept. 23.
Meanwhile, options players continue to bet against a rally in the shares. The Schaeffer's put/call open interest ratio for MSO stands at 0.77, which is higher than 77% of all those taken during the past 12 months. In other words, short-term options speculators have been more pessimistically aligned toward the shares only 23% of the time during the past 12 months.
Microsoft Corp.
Before the open this morning, software behemoth Microsoft Corp. (MSFT: sentiment, chart, options) reported an 18% drop in fiscal first-quarter earnings, but results easily beat Wall Street's forecast. The company banked a profit of $3.57 billion, or 40 cents a share, compared to its year-ago profit of $4.37 billion, or 48 cents a share. Revenue fell 14% to $12.92 billion. Analysts had estimated Microsoft would post earnings of 32 cents a share and $12.4 billion in revenue.
Tight cost controls contributed to better-than-expected profit, the company said.
The security has jumped an impressive 8.6% this morning, tagging a fresh annual high of $29.35. The stock has trudged steadily higher along the support of its ascending 10-week moving average – a trendline the equity has not closed a week below since the end of March.
Heading into the earnings report, options players loaded up on the stock's calls in anticipation of a positive earnings report. The International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) saw a surge in call trading. The ISE/CBOE 10-day call/put volume ratio comes in at 3.39, indicating that call volume more than triples put volume during the past two trading weeks. This ratio is also higher than 94% of all those taken during the past 12 months.
Netflix Inc.
After the close on Thursday, Netflix Inc. (NFLX: sentiment, chart, options) posted third-quarter earnings that shot 48% higher on greater subscriptions to its services. The firm banked a profit of $30.1 million, or 52 cents a share, compared with a profit of $20.4 million, or 33 cents a share, in the same quarter a year ago. Excluding stock-based compensation, Netflix said it would have earned 55 cents a share in the latest three months. Revenue rose 24% to $423.1 million. Analysts were expecting a profit, excluding stock-based compensation, of 49 cents a share on revenue of $419.9 million.
From a technical perspective, NFLX is up more than 8%, tagging a fresh all-time high of $54.96. Prior to today's action, the security was up more than 66% on the year.
Short sellers could feel the squeeze today. During the past month, the number of NFLX shares sold short increased by 7% to 13.8 million shares. This accumulation of bearish bets accounts for more than 29% of the company's float and could fuel a significant rally in the shares.
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