Schaeffer's Midday Options Update Features General Motors, Linn Energy, bebe stores, American Retirement, and Tyco International.
Options Update: Trading Options on Tyco International
The 11,000 mark does not look to be tenable for the Dow Jones Industrial Average (DJIA) this week. After some strong trading at the beginning of the week, strength is fading. The DJIA is currently below 10,950 and, with the advance/decline ratio at the New York Stock Exchange coming in at 1.00. At the NASDAQ, things are a little better, with the ratio at 0.97.
General Motors Plans its U-Turn
General Motors (NYSE:GM) issued a press release today, stressing the company's plan for a turnaround in 2006. Chairman and Chief Executive Officer Rick Wagoner met with analysts and said: "We continue to explore ways to strengthen our liquidity, and we know the most obvious way is to get our North American automotive operations back to generating positive cash flow." GM expects to realize approximately $4 billion in savings in 2006 as the initiatives are implemented throughout this year. Wagoner focused attention on the newer models in the product lineup. According to the press release, approximately 29 percent of GM's North American sales volume is expected to come from recently launched cars and trucks, as well as upcoming new entries such as the Chevrolet Tahoe, Saturn Sky, GMC Yukon, Cadillac Escalade, and Saturn Aura. By 2007, GM expects more than 30 percent of its sales volume to come from these new vehicles.
A New Line on Wall Street
In the first U.S. IPO of 2006, Linn Energy (NASDAQ:LINE) was gaining ground this morning. Shares of the Pittsburgh-based natural gas producer surged almost 20 percent before easing back. According to Hoover's, Michael Linn's company Linn Energy has successfully drilled for natural gas in the Appalachian Basin. The company made seven property acquisitions (including more than 1,230 producing wells) between 2003 and 2005 in New York, Pennsylvania, Virginia, and West Virginia. LINE has drilled 126 wells with a 100-percent success rate, and has proved reserves of 100.9 billion cu. ft. of natural gas equivalent.
Retail Ups and Downs
AnnTaylor Stores (ANN) and Abercrombie & Fitch (ANF) both received downgrades from Prudential this morning. Meanwhile Morgan Keenan upgraded bebe stores (NASDAQ:BEBE). I saw no report of Prudential's reasons for the downgrade, but Morgan Keenan cited BEBE's spring lineup. ANN was down 3.68 percent at last check to 32.69, ANF was down 3.92 percent at 63.53, and BEBE was up 11.25 percent at 16.02.
Not a Retiring Stock Today
American Retirement (NYSE:ACR), which provides senior-living housing and care, was the leading stock on the New York Stock Exchange this morning, after the company forecast full-year 2006 earnings of 62 to 64 cents per share, including an estimated 12 cents per share in share-based, non-cash compensation expense. ACR also said it expects 2005 earnings to be close to the Thomson First Call consensus estimate of 48 cents per share. The stock hit an all-time high today, and was up more than 10 percent at last check.
Most Active Options
At 1:58 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,936.2) has shed 0.24 percent. The S&P 500 Index (SPX - 1,284.54) is 0.12 percent lower, and the Nasdaq Composite (COMP - 2,312.6) has lost 0.18 percent. At 1:58 p.m. Eastern time, 2,375,199 calls have changed hands compared to 1,589,420 puts, equaling a single-day put/call volume ratio of 0.60. The CBOE's equity put/call volume ratio weighed in at 0.65.
This morning, Tyco International (NYSE:TYC) lowered its first-quarter earnings guidance to 38 cents per share, down from a range of 40 to 42 cents per share. It also cut its 2006 earnings guidance. But the big news is that the company is to split into three separate entities, all of which will trade publicly. A press release issued by the company this morning says that the three new companies will be Tyco Healthcare, one of the world's leading diversified healthcare companies; Tyco Electronics, the world's largest passive electronic components manufacturer, and the combination of Tyco Fire & Security and Engineered Products & Services, a global business with leading positions in residential and commercial security, fire protection and industrial products and services.
The stock saw some active trading in the options pits this morning. By the time we grabbed our figures, 11,749 of the February 27.5 call (TYC BY) had changed hands. Open interest on that contract was just 1,632 before trading began, so we're almost guaranteed to see that figure increase. In addition, 25,438 of the January 27.5 put (TYC MY) crossed the tape, and another 10,497 of the February 27.5 put (TYC NY) traded. On those two contracts, open interest at the start of the day was 48,789 and 11,045 respectively.
The stock seems to have met resistance, and I'm a little concerned that one of the key Fibonacci retracement levels (38.2 percent, 50 percent, and 61.8 percent) might cause TYC problems. In early 2005, the stock was rejected by the 50-percent retracement level, and it has been struggling ever since. For several months, it has battled resistance at the 38.2-percent retracement line.
Let's turn to sentiment for TYC. Regular readers of this space know that we employ an Expectational Analysis(R) investment approach that seeks out equities that have sound fundamental and technical backdrops but still have pessimism present in their sentiment background.
We track a diverse range of sentiment measures, but three of the popular ones are:
--Analyst ratings, to gauge Street sentiment
--Equities sentiment, in the form of short selling
--Options sentiment, in the form of put/call ratios and trends, and peak open interest
According to Zacks TYC receives:
--3 "strong buys"
--0 "strong sells"
This sentiment is a little mixed. Remember that the "hold" rating is cautious rather than neutral, and certainly leaves room for upgrades that could help the stock.
During December, TYC's short interest fell very slightly and less than two percent of the float is currently sold short. The short-interest ratio now stands at 3.49 days to cover. We monitor short interest because sometimes good news comes along and pushes a stock's price up sharply. This might shake out some of the short sellers, who suddenly see that it will cost more money to buy their stocks back than they tucked under the mattress when they originally sold the positions. If these turncoat short sellers suddenly transform into buyers, they can push the stock price yet higher and perhaps provoke further short covering. We usually take note when the short-interest ratio passes five.
How about the options bunch? How do they feel about TYC? Puts outnumber calls in the front three months of options activity, pushing the Schaeffer's put/call open interest ratio for the stock to 1.29, higher than 96 percent of readings taken during the past year. This is close to a pessimistic extreme.
TYC earns itself a Schaeffer's Equity Scorecard rating of 7.0 out of a possible 10.
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About Schaeffer's Investment Research (www.SchaeffersResearch.com)
Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology: http://www.SchaeffersResearch.com/method .
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|Date:||Jan 13, 2006|
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