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Options Edge: Liz Claiborne, Regions Financial, Ambac Financial Group, and SunTrust Banks

The apparel issue swung to a wider-than-expected third-quarter loss

by Elizabeth Harrow (eharrow@sir-inc.com) 11/4/2009 9:29 AM

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Today's column includes a widened quarterly deficit for Liz Claiborne, Inc. (LIZ), a credit downgrade for Regions Financial Corporation (RF), an earnings shocker from Ambac Financial Group, Inc. (ABK), and a rare bullish note for SunTrust Banks, Inc. (STI). Each day, Options Edge focuses on the hot stocks in the news and gives you a unique insight into each stock's sentiment backdrop. Our time-tested contrarian approach centers on options, and gives you the trading tools to approach the day with a much-needed edge over the investing herd.

Liz Claiborne, Inc.

This morning, Liz Claiborne, Inc. (LIZ: sentiment, chart, options) reported a third-quarter loss of $90.5 million, or 96 cents per share, wider than its year-ago deficit of $68.7 million, or 73 cents per share. Excluding write-downs and other items, LIZ lost 43 cents per share in the recently concluded quarter, while sales fell 24% to $769.6 million. Both numbers fell short of Wall Street's consensus estimates, which called for a loss of just 20 cents per share on $799 million in revenue.

LIZ price chart Nevertheless, CEO William L. McComb put a positive spin on the results. "Our financial results in the third quarter reflect some early signs of turning around underperforming businesses," he stated, adding that LIZ is "posting significantly improved comparable store sales results" in the fourth quarter so far.

LIZ is off 1.5% in pre-market trading, suggesting that traders are none too pleased with the company's turnaround efforts. The shares have added nearly 111% year-to-date, but they're currently poised to finish the week below their 10-week moving average for the first time since late July.

As a result of today's earnings miss, peak call open interest of 2,182 contracts at the November 7.50 strike is set to go even deeper out of the money. However, with roughly 18% of the stock's float sold short, it's quite possible that these calls were picked up in order to hedge bearish bets against the stock.

Regions Financial Corporation

Regions Financial Corporation (RF: sentiment, chart, options) was hit with a downgrade from Standard & Poor's this morning, with the firm cutting RF's counterparty credit rating from "BBB+/A-2" to "BBB/A-3." The rating for Regions Bank was cut from "A-/A-2" to "BBB+/A-2," and the outlook is negative -- suggesting additional downgrades could be in store. S&P cited RF's third-quarter results, which were "somewhat weaker than... expected, as credit quality continued to deteriorate rapidly and capital ratios fell sequentially."

Nevertheless, RF is up 2.3% ahead of the open. The equity gained ground after last night's closing bell, following a report that the banking issue will continue its participation in the FDIC's Transaction Account Guarantee program through June 30.

RF has recently breached support from its 20-week and 80-day moving averages, but a heavy amount of investor pessimism has the stock well-positioned to benefit from any hint of good news. The equity's 10-day International Securities Exchange (ISE) put/call volume ratio of 3.56 is hovering less than one percentage point from an annual bearish peak, and short interest accounts for a healthy 5.2% of RF's float.

Ambac Financial Group, Inc.

Ambac Financial Group, Inc. (ABK: sentiment, chart, options) stepped into the earnings spotlight this morning, with the beleaguered insurance issue swinging to an unexpectedly robust third-quarter profit. ABK raked in $2.19 billion, or $7.58 per share, nearly reversing its year-ago loss of $2.4 billion, or $8.45 per share. ABK's bottom line was boosted by $2.13 billion in gains from credit derivatives. Analysts were caught off-guard by today's upbeat report, with consensus estimates calling for ABK to report a loss of $4.43 per share.

ABK has rallied 27% to trade at $1.41 in electronic action, whittling away at its year-to-date drop of 14.6%. The stock is clinging desperately to support at its 10-month moving average, above which it is has now notched three consecutive monthly closes.

Speculative investors were likely set on their heels by ABK's blowout quarterly report, as option activity has had a distinctly downbeat tone in recent weeks. The stock's 10-day ISE put/call volume ratio of 0.15 ranks higher than 95.7% of comparable readings taken during the past year, revealing that traders have rarely snapped up puts over calls at a faster pace.

SunTrust Banks, Inc.

SunTrust Banks, Inc. (STI: sentiment, chart, options) garnered a bullish brokerage note this morning, as BMO raised its rating on the shares from "market perform" to "outperform." It's a rare endorsement for STI, as Zacks reports that 18 analysts maintain a "hold" or "sell" rating on the stock, compared to just five "buy" or better recommendations.

STI is up 2.2% ahead of the bell, and the shares are now in position to reclaim a foothold atop their 80-day moving average. The equity breached support here during the last week of October, and it has more recently felt pressure from its 10-day trendline.

Unfortunately, heavy out-of-the-money call open interest in the front-month series could limit STI's upward progress during the short term. The stock's November 23 call is home to peak call open interest of 8,750 contracts, which could exert options-related resistance as expiration draws closer.

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