Schaeffer's Trading Floor Blog

Buzz Stocks: PetSmart, Inc., Oplink Communications, Inc, and Agios Pharmaceuticals Inc

Today's stocks to watch in the news include PETM, OPLK, and AGIO

by 11/19/2014 9:23 AM
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U.S. stocks are sticking close to breakeven this morning, as Wall Street awaits the latest Federal Open Market Committee (FOMC) meeting minutes. Among the equities in focus are pet products provider PetSmart, Inc. (NASDAQ:PETM), optical components designer Oplink Communications, Inc (NASDAQ:OPLK), and drugmaker Agios Pharmaceuticals Inc (NASDAQ:AGIO).

  • After settling at a year-to-date closing high of $73.62 yesterday, PETM is pointed 3.9% higher ahead of the bell, as traders digest the company's solid quarterly earnings and reports of a bid to be taken private. Specifically, KKR & Co. L.P. (NYSE:KKR) and Clayton, Dubilier & Rice LLC will join forces to take PetSmart, Inc. private for more than $7.5 billion, and are expected to unveil their joint bid sometime next month, Reuters reported. Already, analysts are waxing optimistic, with Credit Suisse upping its price target on PETM to $75 from $65, and BofA-Merrill Lynch upgrading the stock to "neutral" from "underperform." Despite outperforming the record-setting S&P 500 Index (SPX) during the past three months, today's upbeat analyst attention is relatively rare for PETM, as not one of the 18 brokerage firms following the stock deems it worthy of a "buy" rating. Plus, short interest represents nearly eight sessions' worth of pent-up buying demand, at PETM's average pace of trading. Additional upgrades and/or a short squeeze could add fuel to the equity's fire.

  • After being temporarily halted in pre-market action, OPLK is set to surge 13.7% on buyout news of its own. Privately held Koch Industries this morning said it will acquire Oplink Communications, Inc for roughly $445 million in cash, or $24.25 per share -- a 14% premium to OPLK's closing price of $21.25. Short-term options traders are likely cheering the news, as the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.13 sits just 1 percentage point from a 12-month low. In other words, near-term speculators have rarely been more call-biased during the past year.

  • AGIO is poised to open with a 5% lead, thanks to encouraging data on its cancer drug, AG-120. As such, the stock will likely explore record-high territory north of $90, adding to its already impressive year-to-date gain of 250%. Canaccord Genuity expects to see AGIO shares in triple digits soon, upping its price target on the security to $111 from $97 and maintaining a "buy" endorsement. There could be more on the way, as the average 12-month price target for Agios Pharmaceuticals Inc is $83.20, representing a discount to the stock's closing price of $83.81 on Tuesday. Meanwhile, it would take a week to buy back all the AGIO shorted shares, at the stock's average pace of trading -- ample fuel for a short-covering rally.

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Analyst Upgrades: Lowe's Companies, Inc., SunEdison Inc, and Potash Corp./Saskatchewan (USA)

Analysts upwardly revised their ratings on LOW, SUNE, and POT

by 11/19/2014 9:10 AM
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Analysts are weighing in today on home improvement retailer Lowe's Companies, Inc. (NYSE:LOW), alternative energy concern SunEdison Inc (NYSE:SUNE), and fertilizer firm Potash Corp./Saskatchewan (USA) (NYSE:POT). Here's a quick roundup of today's bullish brokerage notes on LOW, SUNE, and POT.

  • Unlike sector peer The Home Depot Inc. (NYSE:HD), LOW is poised for a post-earnings rally today. Specifically, the company's upwardly revised full-year forecast was met with a price-target hike to $64 from $62 at Morgan Stanley -- with the brokerage firm underscoring its "equal weight" rating -- sending the shares 5% higher ahead of the bell. Today's projected price movement only echoes Lowe's Companies, Inc.'s withstanding technical tenacity, with the stock boasting an impressive 18.1% year-to-date gain. A continued rise could prompt another round of bullish brokerage notes, as the majority of analysts covering the shares maintain a "hold" or "strong sell" suggestion, while the consensus 12-month price target of $57.83 stands at a discount to last night's close at $58.53.

  • SUNE had quite the day yesterday, surging 29.3% to settle at $21.48, on some well-received M&A news. The stock is ready to extend this momentum in today's session, thanks to price-target hikes at Needham (to $28) and Cowen and Company (to $33), with the brokerage firms reiterating their respective "buy" and "outperform" ratings. Year-to-date, the security is up nearly 65%, leaving the door wide open for an unwinding of skepticism -- which could help propel the shares higher. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for example, SUNE's 50-day put/call volume ratio of 0.80 ranks 1 percentage point away from an annual bearish peak. Elsewhere, 30% of the equity's float is sold short, representing nearly a week's worth of pent-up buying demand, at SunEdison Inc's average daily pace of trading.

  • Susquehanna, TD Securities, and Raymond James all upped their price targets on POT, with the last of the trio also raising its rating to "outperform" from "market perform." On Tuesday, POT jumped 4.8% to close at $35.40, after Russian potash rival Uralkali OAO shuttered operations at one of its mines, and now sits 7.4% above its year-to-date breakeven level. On the sentiment front, option traders have been initiating bearish bets over bullish at a slightly accelerated clip in recent months, per POT's 50-day ISE/CBOE/PHLX put/call volume ratio of 0.49, which sits higher than 63% of similar readings taken in the past year. Echoing this put-skewed trend is POT's Schaeffer's put/call open interest ratio (SOIR) of 0.94, which ranks in the 80th percentile of its annual range. Simply stated, short-term speculators are more put-heavy than usual toward Potash Corp./Saskatchewan (USA).

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Why No One Ever Forecasts Lower Volatility

The market perpetually prices in a CBOE Volatility Index (VIX) lift

by 11/19/2014 9:04 AM
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So I saw this rhetorical question go by on Twitter yesterday morning: "Has anyone ever forecast 'less volatility'?"

Generally speaking, the answer is a resounding "no." Anecdotally, nearly any time the topic comes up on TV, it's always in the context of what could cause some sort of future market unrest. No one ever predicts the current calm will persist. Granted, that would make for lousy TV. I imagine if you were asked to make a prediction and you said the same boring, grinding, very-low-volatility upward climb continues, with perhaps two to four randomly spaced shakeouts in the next year, and you had no idea what might cause those shakeouts, you wouldn't get asked back. But saying "the present trend continues" is always a good guess. Trends persist; major changes in tone and direction are relatively rare.

As to predicting volatility itself, you really need specifics. Ten-day realized volatility (RV) in the S&P 500 Index (SPX) sits under 4 now. That translates to a 0.25% range on a typical day. That's about rock-bottom volatility for that particular metric, so no one expects less volatility there.

The price of every option everywhere embeds a volatility forecast for the time period between "now" and when the option expires. So, we don't even need humans to verbalize their volatility forecasts, because money talks. We can quantify those volatility forecasts (i.e., the implied volatility) and compare it to backward-looking realized volatility and give an objective answer to the above question.

And, as we note often, options virtually always price in an uptick in current volatility. The CBOE Volatility Index (VIX) averages about a 4-point premium to RV. The only time RV tends to exceed implied volatility is when you get a pop like we saw in October. And even then, it was more just about the time lag. VIX peaked at 30 on Oct. 15, while the realized volatility calculation peaked on Oct. 21 at 22.5 -- by which time VIX had dropped into the high teens.

What's more, VIX futures almost always predict that VIX itself will lift going forward. January VIX is about 18 now. Unless VIX itself has already popped, this song always remains the same.

So if someone ever asks you whether you think volatility will rise or fall in the future, you should probably just say "Well, the market prices in a volatility lift, so if you believe that's wrong, just sell options and VIX futures."

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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Analyst Update: Actavis plc, Electronic Arts Inc., and United Continental Holdings Inc

Analysts adjusted their ratings on ACT, EA, and UAL

by 11/18/2014 2:01 PM
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Analysts are weighing in today on drugmaker Actavis plc (NYSE:ACT), video game concern Electronic Arts Inc. (NASDAQ:EA), and air travel issue United Continental Holdings Inc (NYSE:UAL). Here's a quick look at today's brokerage notes on ACT, EA, and UAL.

  • Following its buyout of Allergan, Inc. (NYSE:AGN), ACT received price-target hikes at BMO (to $286) and at Bernstein (to $300), which also reiterated its "outperform" rating. As such, shares of Actavis plc have gained 7.5% today to trade at $266.57, and earlier touched a record high of $268.38. Not surprisingly, today's bullish attention is commonplace for ACT. Fifteen of the 16 analysts covering the stock have given it a "buy" or better assessment, and the equity's consensus 12-month price target of $280.88 stands in uncharted territory.

  • EA is rallying on the heels of an "overweight" initiation at Barclays. What's more, the brokerage firm set a price target of $48 on the shares. The stock has responded positively to these developments, up 3.4% to hover near $42.80, after earlier hitting a six-year high of $42.86. Electronic Arts Inc.'s technical tenacity extends well beyond today, as the equity is sitting on a year-to-date lead of nearly 87%. Meanwhile, at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EA has racked up a 10-day call/put volume ratio of 3.25 -- in the bullishly skewed 81st percentile of its 52-week range.

  • UAL reached an all-time peak of $58.68 earlier -- and was last seen up 4.3% at $58.40 -- thanks to an upwardly revised price target at Cowen. Specifically, the brokerage firm lifted its target by $13 to $65, to go along with an "outperform" rating. United Continental Holdings Inc is no stranger to positive attention on the Street. In fact, 10 out of 12 covering analysts have doled out "buy" or better opinions -- versus just two total "sells" -- while the stock's 10-day ISE/CBOE/PHLX call/put volume ratio of 6.97 is higher than 97% of comparable readings taken in the last year.

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Most Active Weekly Options: Micron Technology, Inc. (MU)

Micron Technology, Inc. option traders gamble on round-number support

by 11/18/2014 1:10 PM
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The 20 stocks listed in the table below are the names that have attracted the highest weekly options volume during the past 10 trading days. Those highlighted are new to the list since the last time the study was run, and data is courtesy of Schaeffer's Senior Quantitative Analyst Rocky White. One name of notable interest today is Micron Technology, Inc. (NASDAQ:MU), where option traders are rolling the dice on round-number support.

Most Active Weekly Options Table

Ahead of this afternoon's presentation at the UBS Global Technology Conference -- and following reports the company's chief financial officer is retiring -- Micron Technology, Inc. has tacked on 2.3% to trade at $33.04. Since hitting their most recent low of $26.32 in mid-October, shares of MU have rallied roughly 25%, and reclaimed their perch atop the round-number $30 mark along the way. Against this backdrop, a number of speculators in today's session are gambling on this area to serve as a short-term floor over the next several weeks.

Specifically, the equity's weekly 12/5 30-strike put has received notable attention today, with 1,000 contracts on the tape at last check. All of these puts have gone off on the bid side, implied volatility is up 2.4 percentage points, and volume outstrips open interest -- making it safe to assume a fresh batch of short positions is being initiated.

As touched upon, the expectation for today's put writers is for MU to stay north of $30 through the close on Friday, Dec. 5, when the weekly series expires. Delta on the put is currently docked at negative 0.12, suggesting a slim 12% chance the option will be in the money at expiration.

From a wider sentiment perspective, option traders have used puts in a more traditional sense in recent months, per the stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.32, which ranks in the 76th annual percentile. Simply stated, puts have been bought to open over calls at a faster-than-usual clip of late. Should Micron Technology, Inc. (NASDAQ:MU) continue to make its way up the charts, an unwinding of the hedges related to these bets could help fuel the security's fire.


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