Today's column includes yet another asset sale for Citigroup Inc. (C), a rosy forecast from Medtronic, Inc. (MDT), a price-target cut for Delta Air Lines, Inc. (DAL), and some positive pre-earnings sentiment for Tiffany & Co. (TIF). 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.
Citigroup Inc.
Citigroup Inc. (C: sentiment, chart, options) has agreed to sell its Diners Club North America credit card business to BMO Financial Group, the parent company of Bank of Montreal (BMO), as it continues to shed non-core assets and rebuild its primary banking business. The terms of the deal haven't been disclosed, but BMO now has exclusive rights to issue Diners Club cards in the U.S. and Canada. The transaction is expected to close by the end of March, subject to regulatory approval.
Citigroup said the sale will reduce its assets in Citi Holdings by roughly $1 billion, and it's not expected to have a material impact on the bank's net income or capital ratios. However, BMO will approximately double its corporate card business, since the Diners Club card is favored by business travelers.
C shares are flat in pre-market trading as investors digest the news. The stock is currently pinned between support at its 20-week moving average and resistance from its 10-week moving average. These two trendlines have sandwiched the security since late October.
During the short term, the equity's range-bound price trend could be exacerbated by heavy out-of-the-money call open interest. The newly front-month December 5 strike is home to peak call open interest of 670,201 contracts, which could exert options-related resistance as expiration draws closer.
Medtronic, Inc.
Medtronic, Inc. (MDT: sentiment, chart, options) stepped into the earnings spotlight this morning, with the medical device maker reporting a fiscal second-quarter profit of $868 million, or 78 cents per share, up 59% from the year-ago period. Excluding items, MDT raked in 77 cents per share, exceeding analysts' consensus expectations for a profit of 74 cents per share. Revenue for the period arrived at $3.84 billion, up 8% from the same quarter last year, and besting Wall Street's forecast for $3.75 billion.
Looking ahead, MDT raised its fiscal 2010 earnings outlook from $3.10 to $3.20 per share to a new range between $3.17 and $3.22 per share. Edward Jones analyst Aaron Vaughn seemed impressed by the results, telling Reuters, "Clearly, they have confidence in the business going forward."
MDT is up 5.7% ahead of the open, catching a lift from support at its 10-day moving average. Today's post-earnings pop could help the stock establish a firm foothold atop the troublesome $40 level, which has capped the shares' progress since early November.
Prior to the earnings report, option players loaded up on bullish positions. During the past 10 days, traders on the International Securities Exchange (ISE) bought to open 2.54 calls for every put on MDT. This ratio ranks in the 79th annual percentile, revealing a stronger-than-usual bias toward calls over puts. However, with short interest rising 8.2% during the most recent reporting period, some of these calls might have been picked up as hedges.
Delta Air Lines, Inc.
Delta Air Lines, Inc. (DAL: sentiment, chart, options) was one of many legacy airlines to be smacked with a price target cut by analysts at Avondale this morning. "Lacking the earnings that were once anticipated with the major capacity reductions that were implemented, airline stocks will now likely trade parallel with expectations of economic strength," explained the brokerage firm in a note to clients. Avondale trimmed its price target on DAL from $20 to $13, with the new forecast representing a premium of more than 68% to Monday's close.
DAL has shrugged off the negative note to trade up 1.9% in pre-market action. The security is currently positioned to finish its second month out of three atop resistance at its 20-month moving average.
However, speculative investors seem doubtful that DAL can maintain its perch on the charts. The stock's Schaeffer's put/call open interest ratio (SOIR) weighs in at 0.82, which ranks higher than 95% of other such readings taken during the past year. In other words, short-term option traders have been more pessimistically aligned only 5% of the time.
Tiffany & Co.
Tiffany & Co. (TIF: sentiment, chart, options) was treated to a bullish endorsement late Monday, as KeyBanc Capital Markets initiated coverage of the stock with a "buy" rating and a price target of $50. "We think TIF will capture market share due to the financial disarray within jewelry retail," asserted KeyBanc, citing multiple store closures and bankruptcy filings within the industry. The optimistic note comes ahead of a TIF's third-quarter earnings report, which is due out before the market opens tomorrow.
TIF has gained 1.7% ahead of the open, adding to its year-to-date ascent of 77%. The shares are perched comfortably atop support at their 10-week moving average, which hasn't been breached on a weekly closing basis since early July.
Option traders seem enthusiastic as the earnings event draws near, with speculators on Monday veering toward calls over puts by a wide margin. Most active was the stock's out-of-the-money December 44 call, where 1,682 contracts crossed the tape (with 81% changing hands at the ask price). Open interest at this overhead strike surged overnight, from 348 contracts to 1,785 contracts, confirming that new bullish bets were added here on Monday.
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