JOY of Stocks: Q3 Preview and Thoughts, No New Trade

by Dan August 28, 2012 3:10 pm • Commentary

Event: JOY reports Q3 tomorrow before the bell, the options market is implying about an 8% move which is rich to the 4 qtr avg move of about 6.25% and the 8 qtr avg move of about 5.4%.  

Sentiment:  Wall Street analysts fairly positive on the name with 12 Buys, 5 Holds and 2 Sells with an avg 12 month price target of about $75, while short interest sits at about 7.5% of the float.

Price Action:  JOY is down 28.5% ytd,  44% from the 52 week highs made in February and now up about 11% from the 52 week lows made in July.  To suggest that the stock has been volatile is an understatement.  Not only volatile, but JOY has been a massive under-performer this year, especially when you consider how closely the chart had masked the performance of the SPX and of industrial equipment manufacturer CAT until late winer/early spring.  Chart below clearly shows the JOY’s dislocation with the broad market, and even from peers like CAT that are only down about 4.8% ytd.

[caption id="attachment_16107" align="aligncenter" width="589" caption="JOY 2yr chart vs CAT vs SPX from Bloomberg"][/caption]

Volatility: JOY implied volatility averages in the high 40’s. It can see pricing in the 30’s following events or during slow times in the market. Currently the weekly vol is in the 90’s while September vol is just above its historical average at 50. Expect September vol to fall around 10 points or more following earnings, with the Aug weekly vol getting cut in half following the report, but with only 3 days until expiration during which it will eventually be trading at parity by Friday afternoon. Skew is to downside points.


My Thoughts: recent data points relating to coal and iron ore demanded have clearly affected sentiment towards the mining stocks and the equipment suppliers.  Those like JOY heavily exposed to coal are grappling with increasing interest in natural gas domestically and lagging electricity demand from emerging markets like China.  With recent remarks from the likes of BHP and VALE regarding capex cuts, it is hard to make a bullish near term argument, especially as the street still expects 2012 eps to come in 20% above 2011, and sales up 25%.  There appears to be some risk to full year guidance.

That said if earnings and guidance are not as bad as expected the stock could see a fairly healthy bounce, much like the price action we saw from TIF yesterday.

The contrarian in me would rather play for the TIF sort of bounce as opposed to pressing the name through previous 52 week lows, it won’t take much to get this stock going to the upside, as expectations appear to be fairly low heading into the print.

I just don’t have strong enough conviction to play, but thought some of you might appreciate our thoughts.