Oil stocks plunge; AtheroGenics bulls raging; Nvidia sinks; Doral falls; Applica up; Home Depot better

By Ronda Fears

Memphis, Jan. 3 - Crude oil prices opened 2007 with a dramatic 4.5% decline Wednesday, which sent oil stocks and indexes plummeting and, in turn, had many options players scrambling frantically to shift their bets to a bullish strategy.

"All the oil stocks and the oil indexes were very active. Technically, there was a breakdown because of the big drop in oil prices, which was largely attributed to warmer weather," said an options specialist.

Persistent mild winter weather in the United States against a backdrop of adequate global crude inventories, slowing economic growth in the U.S. and higher production from non-OPEC countries prompted the sudden fall in oil futures. Crude oil for February delivery fell Wednesday by $2.73 to a six-week low of $58.32 a barrel on the New York Mercantile Exchange.

ExxonMobil Corp. was a stand-out among the major oil stocks, traders said.

ExxonMobil shares (NYSE: XOM) fell $2.52, or 3.29%, to settle at $74.11. In the options arena, there was huge selling in January $75 calls and an overall collapse in the price of calls, countered by a big buying push in January puts. The most active was the $75 put with whopping volume of 10,689 contracts that pushed it sharply higher by $1.20 to $1.80 but traders also noted a big price move of $2.60 in the $80 put to $6.

AtheroGenics up after-hours

Elsewhere, traders noted an inexplicable but strong bullish tilt toward Atlanta-based biotech concern AtheroGenics Inc., although it was trying to break down Wednesday. The stock (Nasdaq: AGIX) lost 66 cents, or 6.66%, on heavy selling to close at $9.25 but in after-hours activity the stock gained more than half that back to trade last at $9.59.

"There has been a lot of options traded up to $20," another options trader said.

"Someone, who in the world I don't know, is speculating the buy and they see this stock doubling. I don't get it. The only news on the horizon is results coming on a phase 3 heart drug. Other than that, it seems far fetched."

Buyside sources have said for several months that there has been heavy takeover chatter surrounding AtheroGenics, but the trader said its big pharma partner AstraZeneca plc doesn't appear to be overly interested in an all-out acquisition, noting that the biotech company has already formed its own marketing team and manufacturing facilities for the heart drug in question.

In October, AtheroGenics chief executive Russell Medford said AGI-1067, an oral therapy for treatment of atherosclerosis or hardening of the arteries, showed promise that could turn the company around when the phase 3 trial results come out.

"We are truly in the homestretch now," Medford said in an October conference call.

"With success, Arise [the AGI-1067 phase 3 trial] very well could be considered a landmark trial that ushers in a new approach to the treatment of heart disease."

Top institutional holders of AtheroGenics shares with 5% or more as of Sept. 30 are Eastbourne Capital Management LLC with 9.07%, Farallon Capital Management LLC with 7.35% and FMR Corp. with 5.03%.

Nvidia skids on profit taking

Graphics chip maker Nvidia Corp. broke down Wednesday as players flooded in to take profits in the stock, which closed out 2006 at a price double where it started the year. Late in the session, however, traders said there was renewed buying interest on the dip as some players see it as a strong takeover target.

Nvidia shares (Nasdaq: NVDA) broke into the session lower, trading as low as $34.79, then came back in the afternoon to trade as high as $37.52. The stock ended off by 93 cents, or 2.51%, at $36.08.

"Early on it looked like the party was over. Hedge funds were dumping because the stock doubled since the summer. They were taking their profits now," one trader said.

"Then we saw a surge of buyers come in and that helped prop it up for a while. The thinking is that there is still some upside if this one turns some heads as an acquisition target. Even though the stock has bounced back from the lows it saw in 2006, it could still bring a fair price."

Nvidia also gained on the recent launch of a new high-end chip, called GeForce 8800, aimed at power-intensive applications and gamers, the trader said. That, too, could boost its appeal to potential acquirers, he added. The GeForce, according to Nvidia, has twice the number of transistors as its previous generation of graphics chips, and is expected to boost the company's performance for the next couple of quarters.

In 2006, Nvidia came back from facing the threat of being delisted from the Nasdaq and Standard & Poor's putting its credit ratings on review after it failed to file quarterly financial reports, the trader continued. The company is now in compliance with Nasdaq rules after filing late reports and restating results for fiscal 2006 and the first quarter of fiscal 2007 in late November.

Doral plunges as CEO exits

Puerto Rico-based bank Doral Financial Corp. on Wednesday said its chairman John A. Ward III resigned after a disagreement with the board of directors over the future direction of the company - including a sale of the company versus piecemeal asset sales - but traders said the measure failed to restore any faith in the story as a turnaround situation.

The company has been in talks with holders of its floating-rate notes for several weeks, and speculation has focused on a debt-for-equity swap plus cash from asset sales to refinance the $625 million issue, which matures in July At odds in the talks, according to one trader, is the value of Doral equity in the transaction, with bondholders asserting the stock is worth no more than $1 a share.

Doral shares (NYSE: DRL) on Wednesday dropped 26 cents, or 9.06%, to settle at $2.61.

Doral said Ward holds different views over the best process for the company to follow in meeting its capital and liquidity needs and maximize shareholder value, in addition to his disagreement with the board's decision to include certain statements in its third-quarter earnings release.

"His resignation says that he is unhappy that they are only looking at the private equity angle (recapping the floater by diluting common) rather than the outright sale of the company," the trader said.

"I think Ward is worried he will be sued by shareholders. Perhaps they can getter a higher price in that manner [an outright sale of the company]. I doubt it, but for his sake why risk the lawsuit? There is no upside."

Doral named Dennis G. Buchert, an independent director on the board since October, to replace Ward as non-executive chairman. Ward's resignation comes after on the heels of chief financial officer Lidio Soriano resigning in November, with no reason given.

Home Depot draws skepticism

There were skeptics regarding the resignation of Home Depot Inc. chief executive and chairman Robert Nardelli, too, amid pressure from stockholders to consider a merger. The stock gained ground and options activity suggests that rise will be built upon in the future, but one options trader said he was a skeptic thus far of the upside in the Home Depot story.

Home Depot shares (NYSE: HD) added 91 cents on the session, or 2.27%, to $41.07 and traders noted that call option volume of 66,794 contracts compares to put volume of 25,652 contracts while February option-implied volatility of 22 is near a 26-week average, suggesting non-directional price risks.

But the mere departure of the CEO was not that impressive, one trader said.

"A lot of people expected something to happen," he said.

"Whether the CEO leaves doesn't make that much difference as I see it. The renewed LBO rumor looks to drive the stock price for a little while, but I think the stock is pretty close to the threshold. I think that's about $45."

Home Depot said Nardelli has resigned as of Jan. 2 and will be succeeded by Frank Blake, the company's current vice-chairman of the board of directors.

In mid-December, Home Depot said in the face of projections of falling profits and a regulatory probe about its options practices that an investment firm plans to propose a special panel of independent directors review its business strategy.

The planned proposal, by Relational Investors LLC, a small holder of Home Depot shares, would call for a committee to study the company's direction, management performance and strategic options, including a possible buyout.

San Diego-based Relational Investors holds about 0.6% of Home Depot stock but is buying more. Ralph Whitworth, head of Relational Investors, said Home Depot needs to improve its core retail stores to compete better against smaller rival Lowe's.

Applica bidding

As many players had hoped, and betted, a bidding rivalry for small appliance maker Applica Inc. ensued Wednesday that spanned the closing bell but the stock was lower as players consider it to be approaching an upper threshold that major holder Harbinger Capital Partners and suitor Nacco Industries Inc. will not breach.

"Bidding war or no bidding war, I don't think the stock is worth $8," one trader said.

"The bid has gone from $6 to $7.50 but it's not going much higher, so you saw it spring back a little at the close today. Harbinger just keeps matching the Nacco bid, they are not going to go any higher than they have to."

Applica shares (NYSE: APN) ended Wednesday off by 8 cents, or 1%, at $7.91.

Harbinger has been amassing stock in Miramar, Fla.-based Applica since it launched a takeover strategy in October at $6 per share, the trader said. Harbinger now owns upwards of a 32.6% stake in Applica.

Nonetheless, in a second attempt to undermine Harbinger, Nacco increased its offer to $7.75 per share on Wednesday from a previous $6.50 offer in mid-December, which Harbinger matched. After the close, Harbinger then increased its offer to match the latest Nacco bid of $7.75 per share.

Whether Mayfield Heights, Ohio-based Nacco, a conglomerate that makes small housewares in addition to heavy farming and construction equipment, plans to pursue the matter was unknown at press time but Applica said it plans to adjourn a previously scheduled special shareholder meeting on Thursday until Jan. 10 without a vote on any proposal.

Nacco shares (NYSE: NC) gained $1.15 on the session, or 0.84%, to $137.75.

On its acquisition of Applica, Harbinger is proposing a merger of that company with another of its major holdings - Salton, Inc., whose shares gained sharply Wednesday.

Lake Forest, Ill.-based Salton makes and markets the popular George Foreman line of electric hot dog and hamburger grills, among other appliances. Applica makes and markets small appliances under the Black & Decker brand, such as the Gizmo, and others like Spacemaker. Black & Decker Corp. shares took a hit to the tune of 10% on Friday after it warned of weak sales due to the slowdown in the housing market and soft demand for discretionary goods, which would cut into its profits.

In October, Salton hired Houlihan Lokey Howard & Zukin Capital Inc. to conduct a strategic review of its business, with the possible sale among the potential options following Harbinger's suggestion of a merger with Applica.

On Dec. 29, Salton completed a private placement of shares with Harbinger for $1.754 million in which it sold 701,600 shares at $2.50 each. Salton used the proceeds to repurchase from Harbinger its 12¼% senior subordinated notes due 2008 with a total principal amount and accrued interest of $1.754 million.

Salton shares (NYSE: SFP) added 8 cents, or 3.56%, in the regular session to end at $2.35 and in after-hours trade gained another 12 cents, or 5.11%, to $2.47.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.