You Can Lead a Horse to Water, but PIGS
and HOGS get Slaughtered.
The Securities and Exchange Commission appears content with rumors as long as the scuttlebutt moves a stock higher. It appears yet again that Harley Davidson is a contender of a LBO courtesy of (fill in the blank _________________). In March 2010, the repetitive unfounded buyout rumor moved the stock to $28+. In January 2011, the LBO rumors are alive and well with the stock trading at $35.
The HOG is up39% from its 12/31/2009 close and 57% from its June 30, 2010 close.
By Steven M. Sears
IN THE PAST THREE MONTHS, Harley-Davidson's (ticker: HOG) shares have surged some 25%. With the motorcycle maker scheduled to report third-quarter earnings on Tuesday, investors are well advised to hedge recent gains with defensive put options.
The stock typically makes big moves on earnings day, yet Harley-Davidson's options are priced as if shares will move 5.9%, up or down, compared with a 7.4% median earnings day move over the past eight quarters, according to Goldman Sachs' analysis of options volatility.
With the stock at about $32, investors are buying November $32 puts, which cost about $2 a contract, to hedge earnings.
This hedging action reflects a recognition that Harley-Davidson's recent stock gains are likely attributable to vague, recurrent rumors in the options market that the company is a takeover target for a buyout firm. Such news typically attracts "hot money" looking for quick profits, which inevitably causes the stock to make sharp moves higher — and lower.
Indeed, in current trading Harley's November $33 calls are unusually active on takeover rumors. Though the rumor has only pushed the stock up some 50 cents to $32.23, almost 7,000 November $33 calls have traded.
For Harley-Davidson's stock to really trade higher, the company will likely have to report strong earnings, and more importantly, a strong outlook. That's because a lot of the good news is already reflected in the stock price. Of course, if takeover rumors ever pan out, the stock might surge higher, but these rumors have been circulating for months.
In the meantime, to justify sending the price even higher, the company will have to offer investors a credible theme to bid up. If not, the shares could come under pressure, which is why it makes sense to buy puts to hedge the stock just in case the motorcycle maker's earnings report backfires.
Market rumors are circulating that ailing Harley-Davidson may be a takeover target for private equity firms. The rumor has been bubbling up since Mar. 16, according to The Street.
That day there were rumors that private equity firm KKR might be interested in buying the Motor Co., which caused a flurry of trading activity in H-D shares.
The Street attributes the unsubstantiated, leveraged buyout rumors to growing business and Federal Reserve confidence in a U.S. economic recovery.
Meanwhile, options traders were busy Thursday speculating whether the stock would again sink below $25 a share, and a UBS Securities equity analyst lowered her price target on the shares to $28.80 from $32.
Analyst Robin Farley maintained a neutral rating, saying in a note to investors that the Motor Co.'s U.S. retail sales at dealers declined around 15 percent year-over-year in May against an industry decline of around 11 percent. Even though the company's quarter-to-date sales decline of 7 percent is brighter than the first quarter's year-over-year decline of 24 percent, "it also signifies that the worst may not be over" for Harley's dealer-level sales, Farley wrote.
H-D shares, which trade under the symbol HOG, have had a wild ride since their peak in the $70 range in late 2006, to a closing low $8.33 a share Feb. 24, 2009. The shares recently reached $35.49 April 23 of this year, but have settled back into the mid-20s. The stock traded up $1.14 Thursday to close at $27.32, but lost 20 cents in after-hours trading.
That volatility may be why the U.S. Securities and Exchange Commission dubbed HOG one of the first five stocks on the New York Stock Exchange to get the new “circuit breaker” mechanism designed to avoid another “flash crash” in the markets like the one that happened May 6. All of the major markets will implement the system, most by next week.
The failsafe will temporarily halt trading in any S and P 500 stock if it drops 10 percent or more in five minutes’ time.
Posted by Holly Wagner
By Daniel James Hayden IV
Shares of Harley-Davidson, Inc. (NYSE: HOG) ended trading on Tuesday up nearly 7% fueled by takeover rumors.
Rumors are circulating that private equity firm Kohlberg Kravis Roberts may be considering a takeover of the motorcycle manufacturer. Neither Kohlberg Kravis Roberts, nor Harley-Davidson, Inc. have commented on the takeover rumors yet.
Trading activity for the shares of Harley-Davidson were three times the normal volume and the options market also saw heavy trading, where investors were expecting the stock to continue to climb.
Harley-Davidson has suffered financially because it's been difficult to sell expensive motorcycles during a time of high unemployment and economic uncertainty. The company reported a 4th quarter 2009 loss of $218.7 million. Shares of Harley-Davidson ended the Tuesday trading session up 6.98% at $28.35.