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Options Edge: Patriot Coal, Cisco Systems, Valero Energy, and Cheesecake Factory

The coal concern reported a sequential rebound in volumes during the third quarter

by Elizabeth Harrow (eharrow@sir-inc.com) 10/27/2009 9:28 AM

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Today's column includes the latest quarterly results from Patriot Coal Corporation (PCX), acquisition news from Cisco Systems, Inc. (CSCO), a surprisingly wide loss from Valero Energy Corporation (VLO), and a bullish endorsement for The Cheesecake Factory Incorporated (CAKE). 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.

Patriot Coal Corporation

Patriot Coal Corporation (PCX: sentiment, chart, options) this morning reported third-quarter net income of $52.8 million, or 58 cents per share, down from its year-ago results of $71.2 million, or 99 cents per share. Excluding sales contract accretion, PCX swallowed a quarterly loss of 45 cents per share -- two pennies slimmer than the 47-cent loss forecast by analysts. Revenue for the period edged 3% higher to $506.2 million.

PCX price chart Steelmaking coal volumes climbed about 50% from second-quarter levels, while costs declined by upwards of $5 per ton. PCX noted that it's capable of nearly doubling its steelmaking coal volume -- from 5 million tons to 9.5 million tons -- if demand continues to recover.

PCX is up 7.1% in pre-market trading, adding to its year-to-date advance of 79%. The positive earnings momentum should help propel the shares back above their 10-week moving average, which has provided support since late July.

Heading into this morning's earnings report, option traders gravitated toward bullish bets on PCX. The stock's out-of-the-money December 17.50 call saw 3,000 contracts change hands, with 100% of the volume trading at the ask price. Open interest at this back-month strike rose overnight from 3,769 contracts to 5,259, establishing it as the most popular call in the December series.

Cisco Systems, Inc.

Cisco Systems, Inc. (CSCO: sentiment, chart, options) announced plans this morning to purchase ScanSafe, a privately held software firm, for $183 million. ScanSafe provides software-as-a-service (SaaS) Web security solutions for businesses worldwide, and CSCO said the purchase aligns with its "vision to build a borderless network security architecture that combines network and cloud-based services for advanced security enforcement," The deal is expected to close, subject to various conditions, in the second quarter of fiscal 2010.

CSCO is just fractionally higher ahead of the bell as traders digest the Dow component's latest M&A maneuver. The stock has cruised to a gain of 45.4% in 2009, easily outperforming its blue-chip brethren, and the tech titan is currently preparing to challenge former resistance near the $25 level.

Judging by recent buy-to-open option volume, speculators seem sure that CSCO can maintain its positive momentum. The security's 10-day International Securities Exchange (ISE) call/put volume ratio stands at 5.24, which ranks less than one percentage point from an annual optimistic peak.

Valero Energy Corporation

Valero Energy Corporation (VLO: sentiment, chart, options) stepped into the earnings spotlight this morning, and the oil refiner confessed to a third-quarter loss of $489 million, or 87 cents per share. Excluding items, VLO's loss of 39 cents per share was worse than analysts' consensus forecast for a deficit of 33 cents per share. Revenue for the quarter contracted 46% to $19.49 billion, barely outpacing expectations for $18.84 billion.

"We view 2009 as a trough period for refined product demand, and we look forward to an upturn in fundamentals and demand in 2010," reported CEO Bill Klesse.

VLO is off nearly 2% in electronic trading, suggesting the shares will most likely surrender their short-lived reign atop $20 per share. However, options-related support could potentially come into play, as peak put open interest for November rests at the 19 strike. There are 12,890 contracts in residence at this narrowly out-of-the-money strike, which could provide a boost as expiration approaches.

The Cheesecake Factory Incorporated

The Cheesecake Factory Incorporated (CAKE: sentiment, chart, options) scored an upgrade this morning, as Goldman Sachs raised its rating on the restaurant chain from "neutral" to "buy." In a note to clients, Goldman asserted, "CAKE is one of the strongest brands across retail, managing the economic downturn deftly from a branding point of view." The brokerage firm also cited CAKE's "reasonable valuation," which "creates an opportunity for multiple expansion."

CAKE has bounced to a pre-market gain of more than 5%, with the stock fast approaching a technical test at the $20 level. This round-number neighborhood has held the shares in check since August.

However, an unwinding of bearish sentiment could send CAKE north of this technical roadblock. Short interest accounts for a hefty 18.4% of the stock's float, but these skeptics appear to be getting nervous -- during the past 10 days, speculators on the ISE have purchased 1.79 calls for every put on CAKE. With many shorts already rushing to hedge their bets, today's upgrade could provide the catalyst for a running of the bears.

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