Yahoo! (NASDAQ: YHOO) yesterday posted its lowest price in nearly five years. The stock moved to $17.75, down from a 52-week high of $34.08.
The Wall Street Journal pushed the idea that this was an options play. "Trading in Yahoo options leapt to four times the normal level as investors picked up 168,000 calls that allow them to buy the company's stock." In other words, some traders are willing to gamble that the shares will go up.
But, they won't go up. There is growing evidence that marketers prefer search internet ads to display advertising. Yahoo! sells a great deal of display inventory and is a distant second to Google (NASDAQ: GOOG) in search. Some of that may change as Yahoo! begins to use the Google system to create its search results.That may not offset the fact that Yahoo! probably has as much display advertising availability as any company in the world.
Because Yahoo! has shown it is unwilling to make major cost cuts, a flattening of its revenue growth would be a disaster for its investors. The firm's year-over-year sales improvement is already barely above 10%. What had been a growth stock three or four years ago has now become a buyout gamble. Investors still hang on to some hope that Microsoft (NASDAQ: MSFT) or a large media company will make an offer for the portal company.
That means that Yahoo! still carries a "takeover" premium, which begs the question of where the shares might trade at the end of the year, if there are no offers. Investors are gambling that there is a 30% chance that Yahoo! will be bought, if it is not, the stock heads toward $13.
Douglas A. McIntyre is an editor at 247wallst.com.
Yahoo (NASDAQ-YHOO) closed at $28.43. Yahoo is scheduled to report earning on April 22. The Microsoft (NASDAQ-MSFT) deadline for moving forward with a hostile takeover of Yahoo is April 26. Microsoft announced on Jan. 31 an offer for Yahoo payable in $31 cash, or 0.9509 per share. Yahoo May option implied volatility of 55 is above its 26-week average of 40, according to Track Data, suggesting larger price movement.
Options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Financial eras, like social periods, are often defined by moments or epiphanies when decision makers and/or citizens realized that a serious flaw/mistake/problem was occurring through time, and across space, and needed to be corrected.
The ever-incisive FT columnist and economist Martin Wolf describes one contemporary concern that's likely to be addressed: the failure to align the interests of managers with those of investors.
My BloggingStocks colleagues Peter Cohan and Zac Bissonnette have also written on the subject on several occasions in this space, and now the FT's Wolf has assembled additional data that may very well lead to public policy changes, both in Wolf's United Kingdom and in the United States.
The significant declines in share prices at many of the big financial companies have left executives and employees in an unenviable position: many hold options that are badly out of the money (subscription required) and, at companies like The Bear Stearns Companies, Inc. (NYSE: BSC), have literally no chance of ever realizing any value.
Executive pay consulting firm Steven Hall & Partners reports that 55% of Fortune 500 financial services and insurance companies have options with an average strike price that puts them underwater. At Countrywide Financial Corporation (NYSE: CFC), the current share price is about 86% lower than the weighted average strike price of the options held by employees.
All of this presents an interesting executive compensation quandary: the purpose of options is to give executives an incentive that allows them to profit alongside shareholders. But options that are so out of the money as to be hopeless accomplish nothing. What effect might this have on performance? Activist investor Daniel Loeb opined on this very issue in a letter to Star Gas Partners CEO Irik Sevin back in 2005:
According to a new study of company leaders, CEOs tend to approach business risks more prudently when compensated with material pay packages as a larger percentage of overall compensation, instead of a heavy dose of stock options.
From one point of view, this makes little sense: Many (many) executives perform just to the point of making stock prices rise quarter after quarter. After all, would you want to buy options with cheap strike prices only to sell them later for massive profit -- company long-term performance be damned? Due to the greedy nature of many CEOs, this situation seems head-on. The only problem here is that this study refutes that belief.
It concluded that CEOs who are granted large numbers of stock options as a main form of compensation are more likely to make riskier decisions with often negative repercussions on company stock prices. This also makes sense: With more stock options on the table, the risk-taker mentality may come out more for leaders-- who ascend to their positions usually by taking risks in the first place.
The only problem is that most of those risks end in bitter disappointments instead of glowing results. Although stock options are geared toward motivating executives and middle managers to improve a company's future performance, the study's authors argue that that form of compensation is not all that effective in increasing a company's overall results. Moral of the story: liberal stock option granting is a good idea, but just don't overload comp packages with them.
When Hewlett-Packard Co. (NYSE: HPQ) bought Mercury Interactive a little over a year ago, the company probably did not know that a pretty large settlement would be forthcoming from several pension funds that accused the now-subsidiary of stock-option backdating. The settlement reached earlier this week was $117.5 million, the largest of its kind.
The second-largest out-of-court settlement due to accusatory stock options backdating was $18 million, so the Mercury case seems unique: why such a large settlement here? HP knew of the shenanigans when it purchased the company in 2006, although the extent was probably unknown at the time. Even with the $4.5 billion purchase price and the $117.5 million settlement, Mercury was still a wise investment for HP moving forward, as it's already become a lucrative area within the company.
HP wants this situation and settlement to quickly be swept under the rug, which is no surprise. HP is shining these days under operational CEO Mark Hurd and from all appearances, can do little (or no) wrong on its march to continue crushing sales numbers and margins from competitors like IBM Corp. (NYSE: IBM) and Dell, Inc. (NASDAQ: DELL). Oddly, the company has done an admirable job of taking focus away from the corporate spying situation from a year ago and other problems by using its core business strengths to perform very well quarter to quarter.
Stocks moved mildly lower today taking a break from the bullish buying over the last two days. This is not really a bad sign, after all the S&P 500 gained 3.5% Tuesday and Wednesday so losing 0.67% today still leaves it up 2.8% since the Fed cut. September equity options expire tomorrow so we may see some some extra volatility gong into the end of the week.
The NYSE had volume of 3.0 billion shares with 978 shares advancing while 2,331 declined for a loss of 34.43 points to close at 9,936.47. On the NASDAQ, 1.6 billion shares traded, 1,131 advanced and 1,864 declined for a loss of 12.19 to 2,654.29.
In options there were 5.8 million puts and 7.7 million calls traded for a put/call open interest ratio of 0.75. The most active options lists were almost completely filled with ETF and index options. S&P Depositary Receipts Trust ETF (NYSE: SPY) saw very heavy volume on the September 150 calls (SYHIT) with over 643,800 options trading. The SPY September 149 calls (SFBIS) also had a lot of activity moving 300,400 contracts. Financial Sector SPDR ETF (NYSE: XLF) were again active; the September 33 calls (XLFIG) with over 171,900 options trading. PowerShares QQQ Trust ETF (NASDAQ: QQQQ) saw heavy volume on the March 45 puts (QQQOS) with over 199,800 options trading and the March 48 puts (QQQOV) moved 180,500 options trading. .
Kevin Kersten is an Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.
Zale Corporation (NYSE: ZLC) September implied volatility Elevated at 38. ZLC, an operator of 2,300 retail jewelry stores, closed Monday at $22.02. Goldman Sachs says, "We are downgrading ZLC to Sell from Neutral as growing macro headwinds, management upheaval, and poor strategic positioning will likely further pressure earnings." Signet Group (NYSE: SIG), a specialty jewelry retailer, terminated merger talks with ZLC in June 2006. ZLC overall option implied volatility of 38 is above its 26-week average of 30 according to Track Data, indicating larger price risks.
YUM! Brands (NYSE: YUM) implied volatility Elevated into Analyst meeting. YUM closed Monday at $32.72. YUM will host investor meetings in Beijing on September 6-7. Smith Barney has a Buy rating and $38 price target on YUM. SBSH says "YUM's China business is material to the overall business TODAY, representing about 20% of company-wide revenue and 23% of profits." YUM overall option implied volatility of 31 is above its 26-week average of 24 according to Track Data, suggesting larger risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
Today, so far Altria Group moved 23,300 contracts on the September 70 calls and traded 4,700 contracts on the September 75 calls. In options there have been 59,605 contracts traded; of them 13,432 contracts are puts while 46,173 contracts are calls. For all options there are 297,119 put contracts open and 820,321 call contracts open. This means that the put/call open interest ratio for MO is 0.36. With so many more calls than puts being traded it also shows that speculators expect the stock to rise.
Call option activity is generally an indicator of bullish speculation on a stock. Call options give the buyer the right to purchase the stock at a set price. Each option contract is represents an interest in 100 shares of the underlying stock. Some of this call option activity may be people expecting a little boost from the spin-off. Altria's stock has moved from around $57 to $72 over the last year and is now trading near the high end of that range.
Looking at key metrics, Altria Group is solidly in line with its competitors in the industry. MO employs 175,000 people and had revenue of 71.22 billion with a gross margin of 46.6% and a net operating margin of 25.4%. British American Tobacco (NYSE: BTI) employs 97,000 people and had revenue of 19.49 billion with a gross margin of 71.65% and a net operating margin of 31.1%. Reynolds American (NYSE: RAI) employs 7,500 people and had revenue of 8.7 billion with a gross margin of 44.42% and a net operating margin of 26.28%. Altria's profit margin is of 17.1% is healthy and it has a high dividend yield is at 3.8%.
Kevin Kersten is an Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.
It happened at Microsoft (NASDAQ: MSFT), and, to a lesser extent, at Yahoo! (NASDAQ: YHOO). Key employees are at the company for a few years. Their stock options vest, and the shares are longer doubling ever year. So, they exercise their options, pick up a few million dollars, and move on.
Google (NASDAQ: GOOG) is beginning to face the "Microsoft" problem now, according to The Wall Street Journal. As the newspaper points out, stock options granted in 2003 have an average exercise price of $.49 and the shares now trade well north of $500. In 1990, Microsoft's stock was $1. By 1999, it was over $58. A lot of people made money, but, as the price growth disappeared, so did key employees.
Key members of Google's staff can now leave with significant fortunes and go to start-ups which give them a larger role and a new set of financial incentives.
Google could learn something from Microsoft, but a solution would be expensive. The search company could grant key employees large blocks of restricted stock which would vest over several years. There would be a financial consequence for the company's P&L, but the move may be critical to keeping talent.
Even if it throws around more money, Google is faced with the fact that someone with $10 million may want to move on to another challenge, even if that person could make another $5 million by staying.
Family Dollar (NYSE: FDO) has settled shareholder lawsuits relating to the backdating of stock options issued to executives at the company. Under the terms of the settlement, Chairman and Chief Executive
Howard Levine, President and Chief Operating Officer
R. James Kelly, board member
George Mahoney and executive
C. Martin Sowers will give up a total of 210,000 stock options.
The company will also institute corporate governance reforms including the adoption of a majority-vote policy for uncontested elections of directors and the election of two additional independent directors.
Here's what bothers me: The company will be taking a charge of $5.7 million related to the settlement, including $3.5 million to cover the attorney's fees of the shareholders who brought the lawsuits.
This is my question: Given that the company clearly had ineffective internal controls that allowed top executives to receive backdated stock options, why should the company's shareholders have to pick up the tab for the legal fees? CEO Howard Levine made more than $3.1 million last year. Since he and other executives and directors were the ones responsible for options backdating, why shouldn't they pay legal fees?
Cleveland-Cliffs(NYSE: CLF) -- calls bid up aggressively on heavy volume on buyout chatter. CLF, a producer of iron ore pellets, is recently up $1.75 to $75.30 on unconfirmed take over chatter. CLF has a market cap of $3 billion. CLF is expected to file its 1st quarter 2007 form 10-Q in early June. CLF May 75 calls have traded 105 times on transaction volume of 1,712 contracts above its open interest of 935 contracts. CLF May 75 calls are bid $1.70 above its theoretical value of $1.05. CLF May 80 calls have traded 69 times on transaction volume of 1,818 contracts above its theoretical value of 626 contracts according to Track Data. CLF May 80 calls are bid 45 cents above its theoretical value of 04 cents, suggesting hedging for upside risks.
Mosaic Co.(NYSE: MOS) -- volatility & volume Spikes on buyout Speculation. MOS, a producer & marketer of concentrated phosphate and potash crop nutrients, was spun out of Cargill in 2004. MOS is recently up $1.16 to $30.63. MOS is frequently mentioned as a take out target of Potash Corp. (NYSE: POT). MOS call option volume of 4,791 contracts compares to put volume of 643 contracts. MOS June option implied volatility of 48 is above its 26-week average of 36 according to Track Data, suggesting larger for upside price risks.
Rackable Systems (NASDAQ: RACK) implied volatility not confirming Dell (NASDAQ: DELL) speculation. RACK, a provider of servers and storage products, is recently up .54 to $12.49. Market speculation is circulating that Dell is interested in RACK. RACK June option implied volatility of 51 is below its 26-week average of 57 according to Track Data, suggesting decreasing price risk.
Lyondell Petro (NYSE: LYO) volatility stays Elevated as Occidental Petroleum (NYSE: OXY) says it will sell LYO Holdings. LYO a global manufacture of chemicals, plastics and fuel products is recently up $2.91 to $36.00. OXY announced plans to sell all of its 20,990,070 holdings in LYO. LYO June option implied volatility of 34 is above its 26-week average of 31 according to Track Data, suggesting larger risk.
Color me a cynic, but I have a hard time feeling the sincerity in Steve Jobs' promise to make Apple (NASDAQ: AAPL) a more environmentally friendly business, with initiatives like eliminating certain toxic substances from its products and promoting recycling. Jobs issued a five-page memo discussing the new, greener Apple.
If this announcement had come a year ago, in a time when Apple wasn't in the midst of an options-backdating scandal with accusations flying all the way up to Mr. Jobs, I'd applaud the company's efforts. In a way, I still do. But it also seems like a diversionary tactic to draw attention away from governance scandals surrounding the company.
Portfolio.com wrote that, "As Home Depot and Wal-Mart have recently discovered, announcing green initiatives in the face of bad news is a great way to divert media attention from things like $100 million CEO pay packages and ongoing battles over worker wages and benefits."
The magazine also points out that Al Gore's presence on the board of directors may have contributed to the decision, although Gore recently backed the board in opposing shareholder proposals that would have called for more stringent environmental standards at the company.
Yahoo! (NASDAQ: YHOO) yesterday posted its lowest price in nearly five years. The stock moved to $17.75, down from a 52-week high of $34.08.
Yahoo
Stocks moved mildly lower today taking a break from the bullish buying over the last two days. This is not really a bad sign, after all the S&P 500 gained 3.5% Tuesday and Wednesday so losing 0.67% today still leaves it up 2.8% since the Fed cut. September equity options expire tomorrow so we may see some some extra volatility gong into the end of the week. 
Cleveland-Cliffs
Comfort Zone Investing: Getting beyond today
Stock picks and pans for troubled times: RIMM, ED, ISRG, GLW, LEA, SLB, GOOG ...
Is Berkshire Hathaway better than S&P Index?
