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Options Edge: Toyota Motor, Aeropostale, Fuel Systems Solutions, and SunPower Corp.

The Japanese automaker swung to an unexpected profit in the fiscal second quarter

by Elizabeth Harrow (eharrow@sir-inc.com) 11/5/2009 9:29 AM

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Today's column includes upbeat quarterly results from Toyota Motor Corporation (TM), a sales disappointment from Aeropostale, Inc. (ARO), boosted revenue guidance from Fuel Systems Solutions, Inc. (FSYS), and a bullish note for SunPower Corporation (SPWRA). 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.

Toyota Motor Corporation

Toyota Motor Corporation (TM: sentiment, chart, options) is in the spotlight this morning, after the Japanese automaker banked a surprise second-quarter profit and narrowed its full-year loss outlook. TM reported fiscal second-quarter net income of Y21.84 billion, down 84% from its year-ago profit of Y139.81 billion. Despite headwinds provided by a strong yen and weak sales in major markets, the Prius parent dodged a quarterly loss due to reduced provisions for its car leasing division.

TM price chart As a result of TM's cost-cutting efforts and recovering demand for fuel-efficient vehicles, the automaker trimmed its full-year loss forecast. The company now expects to lose Y200 billion for the fiscal year, compared to its previous prediction for a loss of Y450 billion. TM's operating loss is expected to arrive at Y350 billion for the year, compared to its previous forecast for a loss of Y750 billion.

The U.S.-traded shares of Toyota are up nearly 2% in pre-market action, adding to their modest year-to-date gain of 21.4%. However, the stock still faces stiff pressure from its 10-week and 20-week moving averages, which are poised on the verge of a bearish cross. Even if TM tackles these twin roadblocks, the equity's 80-day moving average -- currently hovering near $82 -- could also potentially slow the stock's momentum.

With so many layers of resistance hovering overhead, it should be difficult for TM to live up to call players' high hopes during the short term. Peak call open interest in the November series lies at the out-of-the-money 85 strike, with 2,608 contracts in residence.

Aeropostale, Inc.

Aeropostale, Inc. (ARO: sentiment, chart, options) is set to sink in the wake of its same-store sales results for October. The teen-friendly retailer reported a 3% increase in sales at stores open for at least a year, falling woefully short of analysts' consensus expectations for a 13.8% improvement. The disappointing results have overshadowed ARO's hiked earnings guidance -- the firm now expects net earnings of 90 cents to 91 cents per share for the third quarter, up from its prior forecast for net income of 84 cents to 85 cents per share.

ARO is off more than 10% ahead of the open, with the stock set to continue its recent slump. The shares recently breached support from their 20-week and 80-day moving averages, but support from the security's 10-month moving average, in the $35 region, could provide a potential floor.

Option players seemed well-prepared for today's negative sales surprise, as bearish bets have become the contracts of choice in recent weeks. ARO's 10-day International Securities Exchange (ISE) put/call volume ratio stands at 2.98, with puts bought to open nearly tripling calls during this time frame. This ratio ranks higher than 88% of other such readings taken within the previous year, indicating that puts have rarely been purchased over calls at a faster pace.

Fuel Systems Solutions, Inc.

Fuel Systems Solutions, Inc. (FSYS: sentiment, chart, options) is on the upswing in electronic trading in the wake of its third-quarter earnings report. The firm raked in a profit of $15.5 million, or 88 cents per share, up from its year-ago earnings of $11.9 million, or 75 cents per share. Revenue increased 10% to $116.2 million. Analysts were expecting a much slimmer net profit of 43 cents per share on revenue of just $104.3 million.

Additionally, FSYS boosted its full-year revenue forecast. The alternative-fuel firm is now looking for 2009 revenue of $415 million to $425 million, compared to its previous guidance for sales of $370 million to $380 million.

As a result, FSYS has bolted nearly 14% higher in pre-market trading. The shares are now set to reclaim a foothold above support at their 10-week moving average, which was breached last week for the first time since mid-July.

Judging by yesterday's option volume, a few speculative investors were prepared for just such an upside surprise. Wednesday's most popular strike was the out-of-the-money November 40 call, where 353 contracts crossed the tape. More than 60% of these calls traded near the ask price, sending implied volatility up 4.6%. Open interest rose overnight from 1,476 contracts to 1,612, confirming that new bullish bets were added here yesterday.

SunPower Corporation

SunPower Corporation (SPWRA: sentiment, chart, options) scored an upgrade this morning, with Deutsche Bank boosting its rating from "hold" to "buy." Analyst Steve O'Rourke cited SPWRA's attractive valuation for the upgrade, explaining, "We believe the recent stock swoon is a good entry point for SunPower." The analyst also increased his price target from $28 to $31, representing a premium of 22.5% to Wednesday's closing price.

SPWRA is up more than 3% in electronic trading, but the stock is still pinned beneath long-term resistance from its 10-month moving average. Since December 2007, this trendline has been toppled just three times on a monthly closing basis.

Nevertheless, traders maintain an upbeat attitude toward the shares. SPWRA's 10-day ISE call/put volume ratio is docked at 4.23, just 10 percentage points from an annual optimistic peak. Meanwhile, peak call open interest of 3,892 contracts lies at the November 40 strike, which is currently out of the money by a substantial margin.

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