Nicor Options Soar Higher

Nicor Inc. (GAS) shares and options climbed higher on Thursday as investors continue to look forward to higher natural gas prices. The gas distributor has faced sharp criticism from nearly 500 customers who complained to a consumer watchdog group. Natural gas prices have hit a record high of $1.45 per therm in July, which prompted the company to request a rate hike of $4.460 per month. The company contends that it still offers the lowest gas rates in Illinois even after the rate increase.

More than 12,185 call options traded hands on Thursday, which is nearly 20 times the average daily volume of 619 options. The majority of the trading took place at the October $40 calls, which saw nearly 10,000 contracts trade hands. The second most traded expiration was the October $35 calls, which saw 2,200 contracts trade hands. Currently, these options are predicting that shares will remain above $49.30 per share during the next 22 days.

Shareholders also remain bullish on an investment by Harbinger Capital, which doubled its stake in late August. The hedge fund, which is well known for its shareholder activism, now owns more than 2.83 million shares representing a 6.3 percent stake in the company. Some shareholders are hoping that the hedge fund will take action to unlock value while others are banking on the fact that the hedge fund is simply playing a recovery in natural gas companies.

Nicor is a distributor of natural gas and a transporter of containerized freight in the Bahamas and the Caribbean region. Nicor also owns several energy-related ventures, including Nicor Services, Nicor Solutions and Nicor Advanced Energy, which provide energy-related producs and services to retail markets and Nicor Enerchange, a wholesale natural gas marketing company. Nicor Gas maintains franchise agreements with most of the communities it serves, allowing it to construct, operate and maintain distribution facilities.

Bet on Target’s Recovery with LEAPS

Target Corporation (TGT) shares have retraced to their $50 level after an analyst downgraded the stock citing a weaker sales environment next quarter. Lazard Capital Markets downgraded the retailer to “hold” from “buy” noting rising deliquencies and sustained margin pressures during an uncertain credit environment. However, many experts believe the true value of Target lies in its assets rather than its operating results.

William Ackman’s Pershing Square Capital Management owns more than 10 percent of Target and has insisted that the stock is undervalued. The activist investor noted that the retailer’s owned real estate portfolio could be worth in excess of $50 billion while its credit card portfolio was also undervalued by those on the street. Ackman suggested that Target explore leaseback transactions to unlock the value of its real estate while divesting its credit card divesting to raise cash for buybacks.

Target has already sold roughly half of its credit card receivables and used part of the proceeds to fund a massive share buyback program that is currently in progress. Unfortunately, the tough economic environment has led to depressed real estate values and increased loan losses have caused a lower valuation of its credit card division. As a result, it is likely that Target will have to wait until the market improves before taking any additional actions.

So, just how much is Target worth? Ackman has stated in past filings with the SEC that he believes shares could be worth upwards of $100 a piece if the real estate and credit card portfolios were monetized and shareholder value was unlocked. While the market has turned for the worse, substantial value may still exist in these assets as Target continues to trade at cheap multiples. Currently, these multiples value the company at just $37.8 billion and just 15x earnings.

Investors looking to take advantage of this opportunity may want to look at purchasing LEAPS. The January ‘10 $50 at-the-money LEAPS are currently trading at around $10.50. This means that investors are expecting Target shares to hit $60 a piece during the next 477 days, while the January ‘11 LEAPS suggest a $63.70 price tag over the next 848 days. These prices could represent great deals if Ackman’s prediction of $100+ per share materializes over the next year or two.

LEAPS also provide downside protection in that investors only lose the $1,050 premium paid for the options rather than risking more than $5,000 to purchase the underlying shares. So, if shares decline more than 20% then the trade-off makes sense for the LEAPS option. Furthermore, enterprising traders can even write calls on the LEAPS position to create a diagonal spread to make up for a lack of a dividend!

SalesForce Surges on Takeover Speculation

SalesForce.com, Inc. (CRM) shares and options soared higher Thursday amid renewed takeover chatter, according to FlyOnTheWall. Call option volume hit 4,251 mid-day compared to put volume of 338 contracts in mid-day trading. Meanwhile, CRM’s October implied volatility of 68 is well above its 26-week average of 56, which suggests non-directional price movement.

The business software subscription company has experienced a lot of positive press during the past month with its software named a CRM Market AWard Winner by CRM Magazine and its chief executive Marc Benioff named CEO of the Year by CRO Magazine. Wall Street has also awarded the company with a place on the S&P 500 index in a move that excited shareholders.

Rumors of a SalesForce.com takeover aren’t anything new either. ZDNet’s Larry Dignan was one of the most recent contributors to the idea, suggesting the Dell Inc. (DELL) would prove to be a great suitor. The rationale is that the partnership appears to be much more of a strategic one than a customer-vendor partnership.

Dell has been relatively open to the software as a service paradigm as it tries to sell hardware, software and services in one package to business consumers. The computer manufacturer also acknowledged that there is a very large opportunity that helps customers lower cost in an easier-to-manage environment via SalesForce.com.

Currently, the takeover chatter is nothing more than speculation, but the talks continue to occasionally affect stock and option prices in a very real way. Shares of SalesForce.com are trading up 2.82% to $52.43.

Heinz Options Predict Higher Move Thursday

H.J. Heinz Company (HNZ) is one of the few winners in the market lately as investors remain bullish on the ketchup company. Call options on the stock soared with 64,765 contracts trading hands, which is 19x the average daily volume of 3,408 contracts. The majority of the action was centered around the September $45 and $50 calls, which expire in just one day. Investors are clearly bullish on the stock in the short-term to maintain its upward momentum.

The majority of the strength in H.J. Heinz has to do with strength in foreign sales of packaged foods. Frozen potatoes and soy sauce alone led to a 12 percent rise in net income in the first quarter. Meanwhile, sales rose at least 20 percent in every foreign region, which is good news since the company generates about 60 percent of its sales outside of the U.S. The company also intends to release more than 400 new products within two years and further increase its marketing budget.

H.J. Heinz manufactures and markets a line of processed food products around the world. These products include ketchup, condiments and sauces, frozen products, soups, beans and pasta meals, infant food and other processed food products. The company’s products are manufactured and packaged to provide safe, wholesome foods for consumers as well as foodservice and institutional customers. In August, the company also acquired Benedicta, which specializes in salad dressings.

Betting on a Longs Buyout

Long’s Drug Stores (LDG) shares have been roiling after a $71.50 per share tender offer by CVS Caremark (CVS) was questioned by several large shareholders. These shareholders believe the offer substantially undervalues shares of the drug chain on the basis of its real estate holdings and pharmacy businesses. Many believe that Long’s true value lies closer to $90 per share. So, should investors jump in purchase this stock in hopes of a higher bid?

Bill Ackman of Pershing Square is one of the loudest opponents of the CVS deal despite the tender offer being approved just days after he announced his stake in the firm. The activist investor believes that Long’s real estate alone is conservatively worth $2.9 billion, which means CVS would be getting the pharmacy business and underlying company for “free”. Using comparable sales and income figures, Ackman estimates the true value of Long’s at between $90 and $95 per share.

The Long’s tender offer is also interesting insomuch as it is open until August of 2009. This means that many large shareholders are in no hurry to tender their shares. Meanwhile, those who buy the stock right now are able to essentially have a “put option” at $71.50 while still being able to collect dividends on their investment until that point. While the company recently rejected a bid by Walgreen’s at $75 a share, many experts still believe a higher offer is likely in the cards.

Many experts believe that stock options may be the best way to play this opportunity. The March ’09 call options are considered the safest given the lengthy tender offer timeframe and offer investors the opportunity to play this stock at a cheaper price. The March $80 calls are trading at just $0.40 while the $75 calls are trading at $3 each. This means that if a $90 per share offer did come in, the $80 calls would become worth $10 each while the $75 calls would be worth $15 each. The only risk is if the final offer or tender comes in below $75 per share.

Longs Drug Stores Corporation operates in two business segments: retail drug stores, and through its RxAmerica subsidiary, pharmacy benefit services. Through the Company’s retail drug store segment, it is a retail drug store chain on the West Coast of the United States and in Hawaii, with 510 stores as of January 31, 2008. Longs Drug Stores Corporation’s retail drug store segment also operates a mail order pharmacy business. The Company’s pharmacy benefit services segment provides a range of services related to pharmacy benefit management, including plan design and implementation, claims administration and formulary management to third-party health plans and other organizations.

Hershey Options Soar on Takeover Speculation

The Hershey Company (HSY) saw its options volume soar on Friday as talk of a takeover again hit the market. Over 7,000 call options contracts traded hands in mid-day trading as put volume remained steady at around 400 contracts. The majority of the action was centered around the September $45 calls, which are 11.4% out-of-the-money with just 7 days remaining until expiration. The October $50 calls also saw higher than average volume despite being 23.6% out-of-the-money with 35 days remaining.

Rumors of a Hershey takeover have become commonplace ever since Mars announced that it was buying WM. Wrigley Junior. Analysts have called a takeover unlikely, but noted a joint venture with Nestle or Kraft Foods wouldn’t be out of the question. The reasoning behind the sentiment is because Hershey is loaded with low-margin products with little cash and is dependent on slow-growth markets to sustain its revenues. Additionally, Hershey Trust has a strong grip on the stock in ownership.

The Hershey Company is a manufacturer of chocolate and sugar confectionary products. The company’s product groups include confectionery and snack products, gum and mint refreshment products, and food and beverage enhancers, such as baking ingredients, toppings and beverages. The company manufactures, markets, sells and distributes its products under more than 60 brand names. The Company has five geographic regions operating segments: United States, Canada, Mexico, Brazil and other international locations.

AK Steel Surges on Renewed Takeover Chatter

AK Steel Holding Corporation (AKS) saw unusually high call option activity Monday as renewed takeover chatter drew speculators. Some 31,736 call options changed hands, which is more than 5x the average daily volume of 7,010 contracts. The majority of the action could be seen in the September $60 calls, which are extremely out-of-the-money strikes, especially given the fact there are merely 10 days until expiration. Implied volatility on the options are also up to 101, above an average of 67.

Talks of a deal resurfaced on reports that the firm has been entertaining sale talks with multiple parties. Sources familiar with the situation have noted that the company is interested in an all-cash offer and has informally been on the block for a couple of months. The company refused to confirm or deny the rumors, but shareholders have certainly entertained them. In fact, the company has been the subject of such rumors for some time.

Shares of AK Steel are trading in the middle of their 52-week range. Investors are hoping that lower energy costs will help reduce overhead and improve margins while a housing recovery could spur demand for the commodity. In the meantime, continued strength in China has kept the price of steel proped up relatively high. The firm’s second quarter earnings soared past expectations with net income up 32%, but the company said it saw slower third quarter shipments.

AK Steel Holding Corporation is a producer of flat-rolled carbon, stainless and electrical steels and tubular products through its wholly owned subsidiary, AK Steek Corporation. The company’s operations consist of seven steelmaking and finish plants located in Indiana, Kentucky, Ohio and Pennsylvania that produce flat-rolled carbon steel, including coated, cold-rolled and hot-rolled products, and specialty stainless and electrical steels that are sold in many forms.

Tesoro Moves Up on Takeover Speculation

Tesoro Corporation (TSO) shares began the week on a positive note after renewed takeover chatter sent the stock higher. Some 81,048 call options changed hands, which is more than 7x the average daily volume of 11,419 contracts. The majority of the action could be seen in the September $20 strike, which saw their implied volatility rise from an average of 67 to 95. The move follows similar activity seen back on September 4th when takeover speculation surfaced.

Refiners like Tesoro have been beaten down to their lowest levels in years as higher oil prices have put pressure on margins. In fact, many refiners are trading at unprecedented earnings multiples of 4 to 5 times, assuming that earnings are as low as analysts are expecting. Tesoro is a big name in California and Hawaii - large markets in the United States - and is trading at these levels, which has many believing that it could be a takeover candidate.

Others are attributing the move to a broader recovery in the refining sector. Lower crude oil prices equate to better profit margins while the prospects of an improving economy mean that demand could be on the rise. Companies like Western Refining rose nearly 9% on Monday while Sunoco and Fronteir Oil Corporation also saw moves to the upside. The key difference and cause for speculation was the increased options activity surround the company.

Frontier Oil Corporation is an independent energy company engaged in crude oil refining and the wholesale marketing of refined petroleum products. Company company operates refineries in Cheyenne, Wyoming and El Dorado, Kansas with a total annual average crude oil capacity of about 162,000 barrels per day. This crude oil is marketed throughout the Eastern slopes of the Rocky Mountain region. Unfortunately, higher oil prices caused shares to be cut in half from nearly $50 to just over $20 per share.

Potash Options Move Higher

Potash Corp. (POT) shares surged higher last week, but the real story was in the options. Some 55,022 call options traded hands, which is more than 2x the average daily volume of 24,375 contracts. The majority of the action was centered around the September $150 to $160 strikes, suggesting that shares are headed north during the next 14 days. In-the-money October $150 and $160 strikes also saw substantial trading activity with a bullish bias.

Shares of Potash are down nearly 50% from their 52-week highs amid worker strikes, supply shortages, and a lower dollar. However, agricultural companies like Potash Corp rose sharply on Friday amid a broad recovery in the commodities market. Potash prices are still on the rise, hitting $760 a ton from just $520 a ton in June. Meanwhile, the firm is trading with a forward multiple of 7x earnings - a cheap price for a company with strong growth.

Last quarter, profits at Potash tripled on these higher potash prices. However, production at its Cory mine has stopped due to strikes that began last week and no new talks have been scheduled. This mine along with others affected account for 30% of the company’s total output and about 6% of global capacity. As a result, the strikes will likely lead to improved margins but lower gross sales. The actual bottom-line affect is the cause for concern and investors remain undecided.

Potash Corporation is an integrated fertilizer and related industrial and feed products company. The company’s potash is produced from six mines in Saskatchewan and one mine in New Brunswick. Of these mines, it owns and operates five in Saskatchewan and the one in New Brunswick. Its nitrogren operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid.

First Solar Options Soar Higher

First Solar, Inc. (FSLR) saw unusually high options activity last week despite a difficult market. Some 15,612 call options traded hands, which is more than double the average daily volume of 6,417 contracts, according to Shaeffer’s Research. The majority of the activity was centered around the October $240 strike. The premiums on these options jumped 3.14% to $19.10, which suggests a price of $259.10 during the next 40 days - a decidedly bullish sentiment for a stock at $236.

Last quarter, First Solar reported a 57 percent increase in quarterly profits, which soared past Wall Street estimates. There had been some concerns that expectations were too high for the firm, but higher-than-expected production from a new plant in Malaysia helped it meet continuing demand. The company reported net income of $69.7 million, or 85 cents per share, during the quarter. This pegs its earnings multiple at around 85x current earnings.

The big question in the solar industry is whether or not key U.S. solar subsidiaries that expire at the end of this year will be extended. New contracts with California utilities have many bullish on the stock with target prices ranging from $350 to $450 for the next 12 months. However, others are skeptical that utilities will continue to pile onto the solar bandwagon - a sentiment that has sent shares of First Solar’s competitors sharply lower. Regardless, it is a situation worth watching for investors.

First Solar designs and manufactures solar modules using a thin film semiconductor technology. Its solar modules employ a thin layer of cadmium telluride semiconductor material to convert sunlight into electricity. It has long-term solar module supply contracts with 12 European project developers and system integrators. Its customers develop, own and operate solar power plants or sell turnkey solar power plants to end-users that include land owners, commercial properties and public agencies.

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