It has been a rough year for Lear Corporation (LEA: sentiment, chart, options), and things just seem to be getting worse. However, investors seem to be smitten with this underperformer. This morning, after the U.S. Senate failed to pass a bailout bill to help the ailing auto industry, Lear withdrew its 2008 outlook, citing overall uncertainty. While LEA is not a member of the Big 3, it is a Michigan-based company that deals directly with the auto sector. Specifically, the company is a major supplier of automotive electronics and the global leader in the market for car seat systems.
At last look, the stock had lost nearly 6% today, but this is hardly new. The shares have taken quite a beating this year; year-to-date, the equity has dropped more than 93%, and since the end of October, it has been traveling sideways in the 1-2 region. Furthermore, LEA has trailed the S&P 500 Index (SPX) by more than 79% during the past 60 trading sessions. Even if the stock is able to find any upward strength, it must still move above its 10-week moving average. This trendline has acted as resistance since the end of May.
Brokerage firms seem to be planted on both sides of the fence. On one side, Zacks lists that all 11 firms covering the security are sitting in the bears' camp. However, the stock's average 12-month price target is docked at $4, a premium of 107% to yesterday's closing price -- according to Thomson Financial. Considering LEA's performance, it could be due for some price-target revisions, pressuring the shares lower.
Despite LEA's technical performance, short-term option players seem to be expecting a rally. The Schaeffer's put/call open interest ratio (SOIR) of 0.51 indicates that calls almost double their put counterparts among options slated to expire within the next 3 months. What's more, this ratio comes in the 37th percentile when compared to all similar other readings, meaning short-term option players have been more bearishly aligned nearly two-thirds of the time during the past year.
Plus, option players seem to be growing more optimistic. During the past 10 trading days on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), LEA saw more than 25 calls bought to open for every 1 put purchased.
Additionally, in the December series of options, the most popular call contract is the 17.50 strike, with open interest of 10,014 contracts. Currently, this position is 807% out of the money. If these bullish bettors choose to close out their losing positions, it could smack the shares lower.
Elsewhere, the few put players have no reason to back away from their stance on LEA. The most popular put contract is at the December 2.50 strike, with open interest of 414. This option is in the money, but the small number of contracts open points to investor optimism. In other words, calls not only far outnumber the puts, but call players are expecting a serious rally in the near future.
In conclusion, LEA is certainly in a heap of trouble. Even with hope of a bailout, the stock is trading near its all-time low. In fact, for the past 3 months, it has been trading 80% below any territory it had previously explored. From a contrarian perspective, the extreme amount of optimism combined with the tumbling price action has bearish implications.
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