The shares of Wachovia Corporation (NYSE: WB) opened on a gain of nearly 6% this morning, thanks to a positive note from brokerage firm UBS. The analysts raised their price target on WB from $12.50 to $16, and reiterated a "neutral" rating. However, the stock has wasted no time in whittling its early morning gains, and slipped into negative territory before midday.
Yesterday, Wachovia shares closed lower after Friedman Billings & Ramsey reinitiated coverage at "underperform." No surprise there -- but, in today's session, the equity is declining on what should have been a bullish boost from UBS. In fact, most financial stocks are higher today following speculation on a potential buyout bid for Lehman Brothers (NYSE: LEH). The Select Sector SPDR Financial Fund (NYSE: XLF) is sitting on a gain of more than 2% at last check.
With most of its sector peers on the upswing, WB's weak price action is a major point of concern. It hints at deep-seated weakness in the shares, and indicates that more downside could be in store. The stock has recently found support at 14, but today's developments reveal that selling pressure on the security is not yet exhausted.
Today's lackluster showing by Wachovia is even more troubling in light of the heavy pessimism swamping the shares. Puts outnumber calls among options slated to expire within three months, and short interest represents a healthy 13.2% of WB's float. With this kind of widespread skepticism, it's not unusual to see a suffering stock rally sharply on any hint of good news, as the weak hands are forced out of their bearish bets. In Wachovia's case, though, it seems most of the remaining skeptics are in it for the long haul.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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