SOURCE: Schaeffer's Investment Research

June 27, 2005 17:03 ET

Schaeffer's Midday Options Update Features Morgan Stanley, Lear, Cardinal Health, and Apollo Group

CINCINNATI, OH -- (MARKET WIRE) -- June 27, 2005 -- Today's Schaeffer's Midday Options Update features Morgan Stanley (NYSE: MWD), Lear (NYSE: LEA), Cardinal Health (NYSE: CAH), and Apollo Group (NASDAQ: APOL). The Midday Options Update contains a brief commentary on the day's most notable activity and a table listing the most-active calls and puts for the day.

The Midday Options Update is published every day at -- the home of Bernie Schaeffer and Schaeffer's Investment Research. For additional information about this report or to have it delivered to you free via email every day click on the following link. .

Options Update: Apollo Group

Crude futures continue to be unafraid of the 60 level, and it seems as if the whole world has turned nervous as a result. Shares in Tokyo closed down today and European markets are struggling on worries that oil supplies might be inadequate, causing auto stocks and airlines to slip lower as well. There is already talk of winter woes if prices of heating oil return to their recent record highs.

The Chinese premier has warned that there will be no early decision on the country's currency control policy which pegs the Chinese yuan at 8.28 U.S. dollars. Regular readers might remember that we reported this story on May 11, when it led to early-morning panic in New York. The pressure hasn't begun to let up just yet.

More On Morgan

The Wall Street Journal reports that Morgan Stanley's (NYSE: MWD) board is considering John Mack as a replacement for departing Chief Executive Philip Purcell. Mack formerly served as President, and clashed with Purcell in an earlier struggle for control of MWD. If his return to the company really does come to pass, his first task will be to find a way to bring peace to the organization after a leadership struggle that has lasted for months. The stock was down two percent at last check, so it is clear the Street has yet to be impressed.

Fear at Lear

Lear's (NYSE: LEA) website tells me the company has more than 110,000 employees in 34 countries. That data might need to be updated, because the company has announced that it is evaluating plans to close plants and reduce headcount in a global restructuring. LEA is an automotive parts maker and offers seating, flooring and acoustic systems, door panels and trim, and instrumentation to many auto firms. The firm sees pretax costs of $250 million from restructuring, and we hear that the goal is to move some manufacturing operations to lower-cost countries. LEA shares were trading down about two percent at last check.

Cardinal Health Concerns

Cardinal Health (NYSE: CAH) has updated its 2005 and 2006 earnings outlook. For 2005, the company now expects to earn between $3.10 and $3.20 per share, against the Street's estimate of $3.13 per share. The outlook for 2006 is not so vigorous, with guidance of $3.30 to $3.55 coming in well below the consensus estimate for $3.74 per share. CAH attempted to mitigate the bad news by announcing a 100-percent increase in the quarterly dividend, a stock buyback, and an increase in research and development investment, but it does not seem to have impressed the bulls. The stock gapped down this morning and was showing a lost of almost eight percent at last check.

Walgreen Turns Screens Green

Walgreen (WAG) announced third-quarter results, with earnings coming in at $411 million or 40 cents per share, ahead of analyst expectations for 38 cents per share. Sales were up 13 percent to a healthy $10.83 billion on strong prescription and pharmacy sales. The Dow Jones Newswires reported that the company said its investment in digital photo labs helped improve profitability. During the quarter, the WAG opened 85 new drugstores, for a total of 4,805 compared with 4,414 a year ago. It claims to remain on target for a net increase in fiscal 2005 of 365 stores, with a further increase of 390 new stores in fiscal 2006.

Most-Active Options Update

At 1:46 p.m. eastern time, the Dow Jones Industrial Average (DJIA - 10,279.0) has lost 0.18 percent, and the S&P 500 Index (SPX - 1190.18) has lost 0.12. The Nasdaq Composite (COMP - 2,044.1) has shed 0.45 percent. At 1:46 p.m., 1,262,830 calls have traded hands compared to 1,100,538 puts, for a total put/call single-day volume ratio of 0.87 across all six options exchanges. The CBOE's put/call volume ratio stands at 0.89 today.

Apollo Group

The Apollo Group (NASDAQ: APOL) is a company that you might not be familiar with, but you've probably heard of its University of Phoenix, which offers flexible ways to gain a degree. The company saw some unusual option activity this morning at the August 75 put (OAQ TO), and is due to report earnings tomorrow, so it's worth study.

Technically, the picture is mixed. The daily chart since the turn of the year shows an overall decline, though not a particularly large one, with the 10-day and 20-day moving averages pulling into a bearish cross last Friday. However, the weekly chart suggests that the longer-term picture might be better. The powerful 160-week moving average is waiting to offer support should it be needed, and the stock has just punched through overhead resistance from the 80-week moving average, a trendline that it has tested several times since last July. This is an encouraging sign.

Wall Street is positive toward APOL. From Zacks I learned that 17 analysts rate the stock, and six of those give it a "strong buy" against just two "strong sell" ratings. There's also one "buy" and eight cautious "holds." This is a little hard to interpret; there is room for downgrades, but room too for those "hold" ratings to take more of a stand in one direction or another.

Equities players have sold 11.8 million APOL shares short, bringing the short-interest ratio close to five days to cover, a level that starts to make a short-covering rally a possibility if good news comes along. And the Schaeffer's put/call open interest ratio (SOIR) for the stock is more positive that 70 percent of readings taken over the past year, another sign of optimism.

Remember, as contrarians we look for one of the following situations:

--  Fundamental and technical strength amid pessimistic sentiment. This is
    a signal that upside movement could be on the way if any significant good
    news comes along.
--  Fundamental and technical weakness amid optimistic sentiment. This is
    a signal that downside movement could be on the way if any significant bad
    news comes along.
I think that second bullet point might be the one we need to scrutinize. If good news comes along tomorrow when APOL steps up to the earnings confessional, the optimists will feel warm and fuzzy and all will be well. But if APOL apologizes, what then? The stock has done nothing this year, and there's a possibility the optimists might take their college funds elsewhere, precipitating a drop in the price.

I wouldn't take a stand on APOL just now, but if we see a good earnings report and tenure above the 80-day moving (which is edging up toward the 80 level today), then I think the path of least resistance for APOL might be to the upside.

Click on the following link to see a Weekly Chart for APOL with 80-Week and 160-Week Moving Averages: .

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About Schaeffer's Investment Research ( )

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, , 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: .

The Above Is an Investment Opinion Being Issued by Schaeffer's Investment Research.

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