Today's column includes job cuts from Pfizer Inc. (PFE), a wider-than-forecast loss from MBIA Inc. (MBI), an upside earnings surprise from Force Protection, Inc. (FRPT), and a major investor jumping ship from Norfolk Southern Corp. (NSC). 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.
Pfizer Inc.
Pfizer Inc. (PFE: sentiment, chart, options) plans to pare its size after completing its $68 billion acquisition of Wyeth, which left the combined company with a research and development (R&D) budget of $11 billion -- the largest in the drug industry. Late Monday, the pharmaceutical firm said it will shutter six of its 20 R&D sites, including those in Princeton, N.J., Plattsburgh, N.Y., and several facilities in Britain.
Pfizer declined to say how many jobs would be lost due to the site closures, but the firm expects to shed a total of 19,500 positions, or 15% of its work force, as a result of the Wyeth acquisition. The recently completed buyout is expected to generate $4 billion in savings for PFE.
PFE is fractionally lower ahead of the bell, with the stock poised to extend its year-to-date deficit of 1.6%. The equity has easily lagged the broader Dow Jones Industrial Average in 2009, but it's currently perched north of support from its 10-week and 20-week moving averages.
In recent weeks, option players have gravitated toward calls over puts on PFE -- the stock sports a 10-day International Securities Exchange (ISE) call/put volume ratio of 4.53, in the 87th annual percentile. However, with short interest up 10% during the past month, some of these calls could easily have been purchased as hedges.
MBIA Inc.
MBIA Inc. (MBI: sentiment, chart, options) reported last night that it swung to a third-quarter loss of $727.8 million, or $3.50 per share, falling well short of analysts' consensus estimates for a loss of $1.05 per share. The results included a pre-tax unrealized loss of $810.2 million on insured credit derivatives, $238.8 million in pre-tax loss and loss adjustment expenses related to second-lien mortgage loan securitizations, and $171.4 million in pre-tax realized losses and other-than-temporary impairments on investments.
MBI shares are off more than 13% in pre-market trading, with the stock set to test tenuous support at the $4 level. This neighborhood has acted as the lower rail of the insurance issue's trading range since March, with the $8 level stepping up to act as the upper rail.
If the stock continues its retreat, an unwinding of out-of-the-money call open interest could provide an additional headwind for MBI. The security's overhead November 4 and 5 call strikes carry a combined total of 27,474 contracts in residence, which could apply options-related pressure during the short term.
Force Protection, Inc.
Force Protection, Inc. (FRPT: sentiment, chart, options) also stepped into the earnings spotlight last night, with the defense firm boasting a third-quarter profit of $3.2 million, or 5 cents per share, on revenue of $316.2 million. Excluding a $19.3 million pre-tax charge related to its Cheetah inventory, FRPT banked a profit of 23 cents per share. Analysts, meanwhile, were expecting a profit of just 12 cents per share on $211.8 million in revenue.
FRPT has surged nearly 5% in electronic action, and the equity is now in position to challenge resistance from its 10-week and 20-week moving averages. These trendlines haven't been topped on a weekly closing basis since late June.
Meanwhile, if traders reconsider their pessimistic stance on FRPT, a reversal of sentiment could translate to additional buying pressure for the shares. The stock's Schaeffer's put/call open interest ratio (SOIR) rose to 0.39 ahead of earnings, in the 86th annual percentile -- suggesting that short-term speculators have been more bearishly aligned only 14% of the time during the past year.
Norfolk Southern Corp.
In a regulatory filing on Monday, the CEO of Burlington Northern Santa Fe (BNI) revealed that Warren Buffett's Berkshire Hathaway (BRK) will unload its stake in rival railroad Norfolk Southern Corp. (NSC: sentiment, chart, options) between now and the closing date of Berkshire's BNI acquisition. Buffett's company owned 1.9 million shares of NSC as of June 30. Berkshire Hathaway also plans to liquidate its interest in fellow transport firm Union Pacific (UNP), according to the filing.
NSC is fractionally lower in pre-market trading, with the stock struggling to maintain its newly won perch above the $50 level. This area acted as staunch resistance in September and October, but NSC finally rallied above this round-number region last week.
On the speculative front, option players have their doubts as to whether NSC can keep its footing north of $50. Peak put open interest in the November series lies at the 45 strike, with 5,067 contracts outstanding, and the ISE reports that traders have bought to open 2.30 times more puts than calls on NSC during the past two weeks.
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