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Schnitzer Steel Bends on Poor Earnings Forecast

SCHN said lagging demand for recycled metals is to blame for its weak outlook

by 12/19/2011 11:35:01 AM
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Earlier today, Schnitzer Steel Industries, Inc. (SCHN - 43.23) unveiled a downbeat fiscal first-quarter earnings forecast. Thanks to weaker-than-expected global demand for recycled metals, SCHN predicted earnings of 18 cents to 25 cents per share. Analysts were expecting earnings of 55 cents per share.

The Street has reacted harshly to the news, sending SCHN down more than 4.5%, and adding to the stock's 31% year-to-date deficit. The shares are currently staring up at the $45 area, which has alternately served as both support and resistance over the past several months.


Elsewhere, it seems that option players are growing more bullish toward SCHN. During the past 10 days, speculators on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open 3.87 calls for every put. This ratio arrives in the 62nd percentile of its annual range, signaling that traders on these exchanges have made bullish bets over bearish at a faster pace than usual over the past couple weeks.

Furthermore, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.68 indicates that calls outnumber puts among options slated to expire within three months. This ratio ranks six percentage points away from an annual low, implying that near-term option traders have rarely been more positively aligned toward SCHN during the past year.

However, it's possible that a portion of the recent call volume was the result of hedging activity by the shorts. Short interest on the equity rose 2.4% during the past month, and now accounts for 7.1% of the stock's available float.

On the sentiment front, Zacks reports that 55% of analysts uphold a "buy" or better rating on lackluster SCHN. Plus, Thomson Reuters places the average 12-month price target at $54.30, which represents a nearly 19% premium to Friday's closing price of $45.73.

Considering SCHN's trouble on and off the charts, an unwinding of bullish sentiment among the brokerage crowd and/or in the options pits could spell further problems for the industrial metals issue.


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