Joe Kunkle's  Instablog

 Retailers are seeing a lot of options action today after Macy's (M)  fell 8% after reporting quarterly results, and Wal-Mart announced it expects a difficult holiday shopping season.  The names with the action will all report earnings this week, JC Penney (JCP), Wal-Mart (WMT) and Nordstrom (JWN).

 JC Penney's (JCP)    puts are active ahead  of  11/13 earnings after Macy's shares got hit on earnings, a close competitor.  At 11:46am 3,000 December $28 puts were bought and 3,000 December $27 puts were sold in an apparent bearish spread, but there was also a trade of 3,000 December $30 puts at $0.90, below the bid.  Shares are breaking down intraday and the action looks bearish in the options pits.  4X average put volume has traded already.  

Nordstrom (JWN)    is trading 11,555 calls and 17,246 puts ahead of tomorrow night's earnings, around 4X average put volume and 2X call volume.  The  most  notable action was with the closing of November $35 call positions earlier, but now another large bearish trade hit, with a ratio put spread buyer in December, as the trader buys 3,000 December $35 puts and sells 6,000 December $32 puts for a 15 cent debit in a trade that is bearish on both price and the 49% implied volatility.  

Wal-Mart (WMT)  will report earnings before the open tomorrow morning and is a key market mover as a great indicator of where the economy is, and where it is heading.  Shares are a bit higher today despite making cautious comments and 53,500 calls have traded and 12,700 puts, nearly 2X average call volume although a good deal is in selling calls.    The largest trade was early this morning at 9:45am with a trader selling 5,000 December $55 calls in a buy-write strategy, looking for shares to head a bit higher this year.  There is also a lot of closing trades in  the  November $52.50 calls today.

The best read from this is that option traders are positioning more positive for Wal-Mart as compared to the more pricey retailers, which is good for Wal-Mart, but could be a discouraging sign for how far along we are in an economic recovery.  Another trend to watch is that many of these retailers jumped on same store sales figures in November, and gave fairly strong guidance, so the reaction to the actual numbers have down as  the  least path of resistance, with much of the optimism already baked in.  It is also worth noting that Wal-Mart no longer reports same store sales, so it may have the best chance to surprise investors, and hence the bullish activity.

Urban Outfitters (URBN) will also report earnings this week and is seeing mixed activity today, although recent positioning has had a bullish bias.

Disclosure: Own Ratio Put Spread in JWN

This week will prove to be an important week for the Semiconductors (SMH), a group that has shown leadership through much of the rally.  This week we will see earnings from a few key names including ASML Holding (ASML), Xilinx (XLNX), Altera (ALTR), Intel (INTC), Linear Tech (LLTC), Fairchild Semi (FCS), Advanced Micro (AMD), and Cypress Semi (CY).

It could prove to be a challenge beating investor expectations this quarter after many of the firms raised guidance back in early September (SkyWorks (SWKS), Texas Instruments (TXN), MicroChip (MCHP), Xilinx (XLNX), and Altera (ALTR), and with shares trading at 52 week highs for many of the semiconductors, we could see profit taking post-earnings.

The options market is making mixed bets on the major players in the group, which I will discuss below, but first a look at the Semiconductor ETF (SMH).  One trader sold a 2,500 contract straddle at the January 2010 $25 strike as well, expecting a range trade and looking for an IV drop post earnings season.  The shorter term outlook was a bit more bullish in the Semiconductor ETF (SMH) as 10,000 October $27 puts were sold, and October $27 calls saw some large blocks bought offer side.  Recently there has been increasing put activity in the SMH ahead of this week.  However, a near term target of $28 looks possible on the charts, a prior support area, just over 5% higher from current levels.  We could begin to see some M&A deals surface to help the group move higher near term.

Now, for some of the individual names:

Altera (ALTR) saw bearish bets as 3,030 November $22.50 puts traded against OI of 58, mostly offer side buying.  Shares broke to highs on the recent move today, but there is bearish divergence on the overbought chart. Altera will report earnings tomorrow after the close.  Altera is trading 22X earnings, 5.2X sales, and 28.8X cash flow, so is relatively overvalued in its peer group.  

Bearish activity also resided in Xilinx (XLNX), Linear Tech (LLTC), Atheros (ATHR), Intersil (ISIL), and Omnivision(OVTI) today.  Broadcom (BRCM) had a few large trades that all had bearish outlooks, including a buyer of 2,000 October $31 puts and active October $30 call selling.  

Texas Instruments (TXN) was on the other side of the spectrum where more than 10,000 November $23 calls traded, mostly buyers.  Skyworks (SWKS), Lam Research (LRCX) and Applied Materials (AMAT) were the focus of large bullish short term call buying in large size last Friday.

As you can see, traders are focusing in on the individual names, so I expect that we see a mixed bag of earnings, and also expect that lofty expectations will not be met by many of the companies.  Of the names mentioned Skyworks (SWKS) is my favorite fundamental pick, while Applied Materials (AMAT) and Linear Tech (LLTC) have the most bullish charts.

Of the names not mentioned, Maxim Integrated (MXIM), Cree Inc. (CREE), and Tessera (TSRA) are semiconductors I would look at long positions. UltraTech (UTEK) and Entegris (ENTG) are two speculative names worth a look.

Disclosure: Own Linear (LLTC) calls, Broadcom (BRCM) puts

 As merger Monday approaches I thought it would be fitting to look for some potential small cap takeovers in technology, where M&A has been hot recently, and the probability for deals is very high considering 11 of the top technology firms (Cisco, Hewlett Packard, EMC, Google, Microsoft, Qualcomm, Apple, IBM, etc.) have a combines $260 billion for a shopping spree.

The first stage of the recovery for these firms was done via cost-cutting initiatives, but as demand still lags the pace of recent years these companies will look to acquisitions for growth, as organic growth options are minimal, and also make acquisitions to optimize operational practices.

Recent deals for Sun Micro, Perot Systems, and SPSS have paid substantial premiums, in the range of 40 to 80%, so looking for new potential targets can pay off in a big way.

I use a variety of techniques to spot potential targets including valuation, growth, a stranglehold on a type of business, unusual options activity, and strong management.  The following is a list of five names that fit into these categories in one or many ways:

1) Ness Technologies (NSTC): The Israeli IT Services firm specializes in business applications and services, and despite shares being near year highs, the company is cheap at 12.6X earnings and 12.4X free cash flow.  Earnings grew at a 250% clip this year and are forecasted to grow another 56% next year.  With hardly any debt and $50 million in cash on the book, nearly 20% of the market cap, the company would be immediately accretive to earnings.  Hewlett Packard could be interested in Ness Technologies.

2) Compellent Technologies (CML): Compellent quietly has a market cap of $532M and is in the data storage sector where rumors are generally focused on names like Seagate (STX), NetApp (NTAP), and Commvault (CVLT) as potential acquisition targets.  However, I first came across Compellent when I noticed unusual call buying in out of the money options last week, and discovered that this is one of the fastest growing firms in the storage sector.  NetApp's (NTAP) CEO said over the weekend that an acquisition would make sense for the company so this is definitely an industry where we will see consolidation, and I feel Compellent may be the most attractive growth opportunity.  IBM would be a potential bidder for Compellent.

3)  SeaChange International (SEAC): With a market cap of $249M the developer of video on demand services is one of the fastest growing technology names in the universe, with earnings growing 231% year over year, and expected to grow 132% next year.  At 10.88X free cash flow, 1.24X sales, and no debt the company is also an attractive value play.  SeaChange would be an obvious strategic fit for Cisco (CSCO).

4)  SuccessFactors (SFSF):  Shares are breaking near all time highs and teh company has a 10.4% short float, and is expecting to grow earnings by 266% next year.  At a market cap of $860M and a price/cash ratio of 8 the company is well positioned as an attractive target.  As firms look to improve worker efficiency and implement cost savings initiatives, SuccessFactors specializes in business optimization with its performance and talent management systems.  I could see Taleo (TLEO) or Oracle (ORCL) as a potential suitor.

5) Multi-Fineline Electronix (MFLX): With a market cap of $678M and consistent earnings growth of 33% for the past 5 years, Multi-Fineline is trading at the valuation of a no-growth firm.  The company trades 13.8X forward earnings, PEG of 0.8, 5.3X cash, and 9.4X free cash flow.  This is a pure value play as a potential takeover target because I am not exactly sure who would be the acquirer here.  The company would be a fine addition to a larger tech player at this valuation.

Disclosure: No Current Holdings of the Above

 Below are a few of the most interesting trades that took place in the options market on Wednesday September 20th, 2009.  

I not only provide what the action was that traded, but also the most likely reasoning behind the approach and what it means for shares.

For further analysis, and daily live coverage of the options market, please visit my site at OptionsHawk.com.

Best Buy (BBY) had a series of large sized trades hit at 3:23pm with 3 blocks of 3,500 contracts trading.  The October $35 and November $36 puts were sold for $0.35 and $1.50 respectively, with the trader feeling shares have minimal downside.  The electronics retailer recently broke trend support and closed below its 50 day EMA, an ascending triangle breakdown.  The same trader picked up 3,500 December $40 calls at the $1.75 offer, a net trade credit of $0.10.  The trader may be making an extended bet on a strong holiday shopping season due to lack of competition from Circuit City, and Best Buy shares do appear undervalued at 11.9X forward earnings.

Mohawk (MHK) options were active as a trader at 10:11am sold 3,190 November $40 puts at the bid for $1.20, and bought 1,595 November $50 calls for $2.40 is a costless bullish ratio risk reversal.  Mohawk has been involved in some takeover chatter in recent weeks, and implied volatility is elevated at 55%.  Shares struggled to break through $52.50 resistance and now look to be having a near term breakdown, closing below its 50 day EMA for the first time since early July.  Shares trade cheap on a cash flow basis at 6.7X.  The bullish action today comes despite a downgrade from Buy to Neutral at SunTrust.  As housing comes out of a bottom, the leading provider of flooring is expected to see improved demand for its products.

Computer Associates (CA) saw large blocks of November $22.50 puts being bought in the afternoon with shares at $21.99, as 3,575 traded against OI of 1073, mostly in two large blocks, a bearish bet.  Implied volatility is at 41% which is near 6 month highs.  The maker of application software trades just 12X forward earnings and 10.9X cash flow.  The near term bearish bets are unusual with no expected catalysts coming in October.  CA has a lot of cash and could possibly be an acquirer going forward, and the chart is a bit bearish with shares beginning to roll over after failing to break through its 200 week EMA.

Textron (TXT) had a trader place a bullish risk reversal for 3,000 contracts, selling the December $14 puts at $0.50 and buying the December $24 calls for $0.50, a no cost trade betting on upside in shares currently trading for $18.98.  Textron shares trade 2.7X cash value and are seen as an attractive recovery play as it settles many of its debt obligations and shows a stronger balance sheet.  The CEO is stepping down in December and it was rumored months ago that TXT could be an acquisition target for a group in the United Arab Emirates at around $21 per share.  Earnings are scheduled for October 27th.  $19.72 and $29.71 are the next resistance areas for shares, the 23.6% and 38.2% Fibonacci retracement levels from peak to trough.  

Harley Davidson (HOG) shares are breaking down below its 50 day EMA and a block of October $22 puts, 6,400 contracts, and a few others amounting to 10,000+ contracts have been bought at the offer.  Earnings are set for October 15th, the week of Options Expiration.  If the economic numbers are not as positive as hoped, high expense discretionary items will continue to struggle, and Harley could disappoint investors.

Dreamworks (DWA) trades a 2,000 contract bull risk reversal with a seller of the December $30 puts at $0.85 also buying the December $40 calls at $1.04 for a $0.19 debit.  Shares are right in the middle of those strikes at $35.24 so the trader is risking a small amount to look for considerable upside in shares, while feeling $30 is a safe support area for shares.  Dreamworks is a name many see as takeover bait after the Marvel purchase by Disney.  Earnings are set for October 27th and shares have dipped nicely for an entry point in this strategy, testing gap and breakout support.

Valeant Pharma (VRX) with big block buying at the offer in December $22.50 puts with shares at $27.50, a block of 2,900 and 500 thus far with implied volatility at 1 year lows.  The puts traded with blocks of equity and the low delta puts are likely a protective put play on the shares as a hedge.  Valeant shares are trying to breakout to new highs.  As a drug manufacturer shares are cheap at less than 10X cash flow and the Company today announced the purchase of an Australian skincare brand. Its pain drug, retigabine, recently failed some mid-stage trials, but with a partnership with Glaxo (GSK) it plans to submit an NDA before October 23rd. With 15% of the float short, 11 days to cover, I interpret this put activity as bullish because of the strikes used and the equity blocks trading, showing traders are looking to get long the name on a potential short squeeze breakout, combines with the chance of positive drug news.  Retigabine is a first-in-class neuronal potassium channel opener for the adjunctive treatment of partial-onset seizures in adult patients with refractory epilepsy.  Retigabine has shown robust efficacy and safety as demonstrated in two large completed Phase 3 trials conducted in patients with refractory epilepsy receiving treatment with up to three antiepileptic drugs (AEDs). 

DirecTv (DTV), recent speculation of a Verizon takeout, trades a massive options position tied to a block of 660,000 shares, as the November $27/$28 call spread is sold for a $0.50 credit on 5,000 contracts, and the proceeds are used to purchase 10,000 November $23 puts at $0.25 each, a costless trade.  The options trade is extremely bearish, but combines with the equity is more of just a costless hedge as shares are breaking out nearing all time highs just below $29.  Now, if only they could settle the Versus Network dispute with Comcast.

3 Par (PAR) is trading 16X its normal put volume as some big blocks of puts were just bought in October, 1,500 of the $12.50's and 1,000 of the $10's.  Implied volatility is climbing from 79% to 83% today.  Earnings are not set to be released for October expiry so the action is very unusual, possibly looking for a bad pre-announcement.

CF Industries (CF) is seeing some bullish spreads trading with the November $80/$95 call spread being bought twice for 2,500 contracts for a $7.30 debit on a potential $15 payoff with shares above $85 on November expiration.  Agrium (AGU) has made it clear that it will pursue the acquisition of CF, although CF is more interested in acquiring Terra (TRA).  Regardless, many believe that the worst is behind the fertilizer group and it is one of the most attractive industries for futures earnings growth, and CF is an example with a forward PE of 12.5X and trading 10.6X cash flow.  Shares bounced nicely off trend support and prior breakout level at $85 and appear headed higher from here.

ValueClick (VCLK) November $12.50 and $15 calls traded more than 3,000 contracts each and the orders were marked spreads with offer side buying in the $12.50's and bid side selling in the $15's, bullish call spreads accounting for most of the activity.  VCLK trades 9.1X free cash flow and is near a breakout, and is also seen as a takeover target.

Kimberly Clark (KMB) shares were strong throughout the session and had elevated call action, with the November $60 calls and January $60 calls attracting a flurry of offer side buying in each.  Earnings on October 22nd.

Manulife Financial (MFC) had a late day block buy of 2,375 October $20 calls with shares at $20.90, bought at the offer in a bullish bet.  At 2.15X cash and 3.8X cash flow it is tough to argue against a bullish stance in the Life Insurer.  

Disclosure: Own calls in CF, considering buying calls in TXT/MHK and puts in CA

 

 

 

 

 

 

 

I recently have been noting the strength in regional banks, often tracked via the ETF KRE, which has closed higher for 8 straight sessions.  The weekly chart shows a triangle setting up that could result in a breakout at $21, and lead to a massive short squeeze that sends this ETF 50% higher to $31.50.

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Sometimes the classification of stocks is very misleading by the main sources of stock information on the internet, but I have come across 3 stocks that are great growth at a reasonable valuation plays, while having bullish technical patterns.

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