Today's column includes a bleak outlook for Navistar International Corporation (NAV), a bullish endorsement for State Street Corporation (STT), a new director at E TRADE Financial Corporation (ETFC), and a price-target cut for US Airways Group, Inc. (LCC). 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.
Navistar International Corporation
Navistar International Corporation (NAV: sentiment, chart, options) confessed this morning to a 94% slide in fiscal second-quarter earnings, as the truck maker's bottom line was impacted by anemic sales. NAV earned $12 million, or 16 cents per share, in the recently concluded quarter, while revenue slipped 29% to $2.81 billion. Analysts were looking for a much more robust quarterly profit of 94 cents per share on $3.03 billion in revenue.
Additionally, NAV dropped its fiscal year earnings forecast from $5.10 to $5.60 per share to a new range between $2.80 and $3.10 per share. Daniel Ustian, the company's president, chairman, and chief executive officer, reported, "...the current growth of our traditional businesses is hamstrung by the global recession."
In pre-market trading, NAV has shed 8.5%. The stock has gained a respectable 101.3% year-to-date, though, and its post-earnings pullback could potentially be contained by its newly supportive 10-week and 20-week moving averages.
Low expectations across Wall Street should also help cushion the blow from NAV's weak guidance. Bearish bets were the option of choice heading into this morning's report; on Monday, traders sent 4,671 puts across the tape, representing 21 times the equity's average daily put volume. Most active was the out-of-the-money July 35 strike, which added 1,065 put contracts to open interest overnight.
State Street Corporation
State Street Corporation (STT: sentiment, chart, options) scored a bullish brokerage note this morning, as Bernstein initiated coverage on the stock with an "outperform" rating. STT is apparently the firm's top pick among U.S. trust banks; sector peers Bank of New York Mellon (BK) and Northern Trust (NTRS) were initiated today with lukewarm "market perform" ratings.
The shares are starting the day on the right foot as a result, with STT up 2.2% ahead of the open. Since mid-March, the stock has raced consistently higher along the support of its 10-day and 20-day moving averages, and it's now poised to challenge round-number resistance in the $50 region.
However, option players are betting that STT's recent rally is overdone. During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open 3.01 puts for every call on the stock. This ratio ranks in the 86th annual percentile, suggesting that demand for pessimistic positions is higher than usual.
E TRADE Financial Corporation
E TRADE Financial Corporation (ETFC: sentiment, chart, options) announced this morning that Kenneth C. Griffin will join its board of directors. Griffin is the chief executive of Citadel Investment Group, the hedge fund that just so happens to be ETFC's largest debt holder and a 15.6% stakeholder. Citadel exercised its right under a 2007 pact with the online broker to appoint a member to its board.
ETFC investors are apparently enthusiastic that Griffin will be taking a more active role with the beleaguered broker, since the stock has added 4.8% to trade at $1.52 in pre-market action. Despite gaining 26% in 2009, the $1.50 level continues to plague ETFC -- this region has capped the shares on a weekly basis since mid-May.
Due to the equity's troublesome performance, many option traders have adopted a skeptical stance toward ETFC. The stock's Schaeffer's put/call open interest ratio (SOIR) arrived today at 1.32, just one percentage point from an annual pessimistic peak. Considering the security's low perch on the charts, this reading reveals a remarkable level of bearish sentiment.
US Airways Group, Inc.
US Airways Group, Inc. (LCC: sentiment, chart, options) was one of eight U.S. airlines to be smacked today with a price-target cut from Barclays. The brokerage firm dropped its target on LCC from $20 to $13, while simultaneously lowering its estimates on sector peers JetBlue Airways (JBLU), Southwest Airlines (LUV), UAL Corp. (UAUA), and more.
"Swine flu puts a dent in revenue for the second quarter and fuel ticking up as crude rises sharply," analyst Gary Chase commented in a note to clients. Chase tempered his bearish tone by observing that negative sentiment toward the sector appeared to be peaking, and capacity cuts could still be used to mitigate the impact of a challenging fundamental environment.
LCC has shrugged off the target cut to tick fractionally higher ahead of the open. The stock has given up 64.7% of its value so far this year, but speculative investors are holding out hope for a short-term rebound. In the front-month series, peak call open interest of 23,704 contracts lies overhead at the 5 strike.
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