Name That Trade $FIO: Will New Management “Kitchen-Sink” Forward Guidance?

by Dan August 6, 2013 2:09 pm • Commentary

Event: FIO reports fiscal Q4 earnings tomorrow after the close.  The options market is implying about a 17% move, yes 17%, which is rich to the 13.5% avg move over the last 8 qtrs since its IPO.

The stock caught my eye for a couple of reasons – obviously the expected movement, and the stock’s tendency in the past to have massive moves (there have been 4 up averaging ~16.25% and 4 down averaging ~10.5%), but also the short interest that sits at about 35% of the float.  

Additionally FIO’s under-performance ytd to the broad market and its hardware storage peers EMC, NTAP & WDC is fairly glaring with the stock down 32.5%, and down 54% from the 52 week highs made last October.  FIO has suffered from earnings disappointments in 2013 as a result of its heavy concentration among 3 customers, AAPL, FB & HPQ (almost 70% of revenues in 2012) as they scale up and down their data-center builds.  An important concern among investors has been management turnover of late (2 founders left in the spring, including the CEO) and the replacement was the gentleman that Meg Whitman, CEO of HPQ blamed for their Autonomy debacle in which HPQ has claimed fraud and wrote down nearly $9 billion of the acquisition price.  The fundamentals for the company appear to be iffy at best at the moment, but the story could be close to an inflection point.  But the stock’s $1.5b market cap, with $350 million and no debt makes it a fairly easy acquisition target for larger storage/hardware vendors.

Technicals:  On a technical basis the stock seems to be basing and possibly putting in a little bottom trading above its 50 day moving average, and the post IPO low.  The 2 yr chart below shows the 200 day moving average as a potential near term target in and around $18 and $20 as the next big level of technical resistance, which also coincides with the April high.

[caption id="attachment_28924" align="aligncenter" width="589"]FIO 2 yr chart from Bloomberg FIO 2 yr chart from Bloomberg[/caption]

Options Open Interest:  And one more thing, the stock has staged a stealthy rally, up nearly 20% from the June lows, so clearly not left for dead.  Total options open interest favors calls at 114k to 78k.  In addition, a large amount of calls are trading again today, with 26k to 1k calls vs. puts so far, with the most active lines: 7500 Dec 20 calls, 6k Aug 16 calls, 5500 Aug 17 calls and 2600 Aug 18 calls.  Call activity picked up a bit back in June after WDC made a bid for FIO competitor STEC that amounted to almost 100% above where the stock was previously trading.

My View:  So we have a situation where a stock is very oversold, sentiment is poor (short interest 35%) and with very neutral Wall Street analysts ratings, 11 Buys, 13 Holds and 2 Sells), high concentration of top holders (top 10 own about 60% of the float) and sky high implied volatility.  The stock could be up 20% on the slightest bit of a good news.

BUT, new management, after a string of mishaps by their predecessors, may look to guide fiscal 2014 below expectations when they report their Q4 tomorrow and create a situation where they can set the stage for a series of beats, this could obviously cause a re-tracement of some of the recent strength. Regardless, the stock is a tough press on the short-side and we would avoid the name altogether if we did not see potential rays of light, but playing for a short squeeze with long premium seems like a fairly dicey proposition.   We are considering calendars to sell the high implied move in Aug options (no matter what your directional view) and set the stage to own longer dated options for a business turnaround or possible M&A.  We are also considering risk reversals where we finance the purchase of a call or call spread with the sale of a put or a put spread.  Stay tuned, we will be sure to follow up this post with some trade ideas after we vet a few strategies.