Buyers step in as oil stocks bleed; Northwest rises, Delta dives; Foamex falls; Lennar slumps

By Ronda Fears

Memphis, Jan. 4 - In a second day of heavy bleeding in oil stocks, as crude oil futures fell $2.73 to $55.59 on the New York Mercantile Exchange, there were some maverick contrarians buying into the weakness.

"I think it's an over-reaction," said one equity trader.

"Maybe I jumped in too early last week but I think there will eventually be some cold weather and then shortly following that we will already be into the driving season, so eventually oil will come back. I am thinking over the next six months."

Another trader agreed, saying he'd be hard-pressed to find a bear in the crowd, given the weak U.S. dollar, but options traders said there was still extreme unwinding in positions. Exxon Mobil Corp.'s stock (NYSE: EOM) lost $1.39, or 1.88%, to $72.72.

"Oil stocks and the oil indexes were very active again today and sharply lower," an options trader said. "We saw this spill over into the oil services group, too. The outlook for natural gas is getting weaker now, too, you see."

He mentioned Dallas-based offshore drilling company Ensco International Inc., BJ Services Co. and Weatherford International Ltd., also noting those stocks were downgraded at several brokerages. Wachovia Securities said in a report Thursday that the threat of a significant overhang in natural gas storage is rising and there could be additional downside for service companies in 2007.

Ensco shares (NYSE: ESV) lost 89 cents on the session, or 1.84%, to $47.56. BJ Services stock (NYSE: BJS) fell $1.41, or 5.02%, to $26.70. Weatherford shares (NYSE: WFT) gave up $1.75, or 4.53%, to $36.93.

"The bet on these [oilfield service companies] was leaning heavily toward further weakness," the options trader said. "But if you think winter is going to hit, and fairly hard, then you could bet against the crowd and come out nicely."

Northwest gains nearly 6%

The slide in oil prices was good for airlines, however, and bankrupt Northwest Airlines Corp. was one of the biggest gains in the pack. One trader said that the decline in fuel prices should benefit the move for further consolidation in the industry.

Northwest shares (Pink Sheets: NWACQ) gained 26 cents on the day, or 5.86%, to $4.70.

"It just keeps creeping up," said a bulletin board stock trader. "There are still a lot of believers that they will get some buyout deal."

Last month, Northwest hired Evercore Group LLC to assist it with searching for a merger and/or acquisition, either as a buyer or the bought entity. Optimism that some sort of deal could be had, onlookers said, is gained from US Airways Group Inc.'s $8 billion bid for bankrupt Delta Air Lines Inc.

But Delta, the trader pointed out, was one of the few carriers not at the party in airline stocks Thursday, whereas its suitor, US Airways, was the closest to Northwest's rise. Delta shares (Pink Sheets: DALRQ) lost 7 cents on the session, or 5.07%, to $1.31. US Airways stock (NYSE: LCC) added $2.54 on the day, or 4.51%, to $58.84.

Foamex dives on rights launch

Elsewhere in distressed stocks, Foamex Inc. shares took a big dive Thursday as the rights offering related to its exit from bankruptcy was launched at $2.25, sharply below the current market for the stock.

Foamex shares (Pink Sheets: FMXIQ) dropped 39 cents on the session, or 9.59%, to settle at $3.30 after trading in a band of $3.12 to $3.65.

Dec. 29 is the record date to participate in the rights offering, and current big holders are restricted from trading the stock, so traders said it was a matter of some skepticism about where the stock will break after the rights offering in light of the added shares.

"There is going to be considerable dilution so that alone creates a lot of pressure," one bulletin board trader said.

Each right issued to common stockholders will entitle the holder to purchase up to 2.52 common shares, and each right issued to series B preferred stockholders will entitle the holder to purchase up to 252 common shares, each at $2.25 per share.

In addition to the estimated $138.8 million rights offering, Foamex received a commitment for a new $150 million equity investment to fund its emergence from Chapter 11 bankruptcy in October from major stockholders D. E. Shaw Laminar Portfolios, LLC, Goldman, Sachs & Co., Par IV Master Fund, Ltd., Sunrise Partners LP and Sigma Capital Associates, LLC. That group holds 53% of Foamex equity and could end up with 86% after the rights offering.

Separately, Linwood, Pa.-based Foamex, which makes plastic and foam products, has received a commitment from a group of lenders led by Bank of America, NA and Banc of America Securities LLC for up to $790 million of exit financing, of which it expects to draw about $645 million upon emergence from Chapter 11.

Lennar off, contrarians buy

Lennar Corp. continued to slump Thursday in the wake of a downgrade to sell the previous session by a Standard & Poor's equity analyst, but another contrarian analyst at Schaeffer Investments Research was bullish on the homebuilder because he sees the housing slowdown leveling off.

Traders also said the sell-off may have been overdone and options activity suggests severe short covering may be in the offing.

"Options players are firmly entrenched in the bearish camp when it comes to Lennar," said one trader.

"Puts continue to outweigh calls, even while the stock was trending higher. It has taken a big hit this week, but it has been steadily moving up over the past couple of months. As I see it, because of this, Lennar stands to benefit from short-covering. Nearly 9% of the float has been sold short."

The stock (NYSE: LEN) traded in a wide band of $49.80 to $53.20 on Thursday before settling off by 54 cents, or 1.07%, at $50.09, having dropped from around $52.25 at the open Wednesday.

After Lennar warned Tuesday that its November quarter earnings per share will likely fall below its previous guidance and U.S. housing data on Wednesday was weak, S&P analyst Thomas Smith cut Lennar stock to a sell.

But Todd Salamone at Schaeffer is a buyer for Lennar on the recent weakness, as there are signs that the housing slowdown could be reaching a plateau. Last month, according to a Schaeffer report, the chief economist with the National Association of Realtors said the housing market appears to be stabilizing and is expected to stay that way through 2007.

"Obviously, it's unwelcome news for the stock. But since July the homebuilding group has seen this news coming in. However, if you look at the price action over the last six months, these stocks have shaken off the news and shown an uncanny ability to bounce back," Salamone said.

"The market is spooked short term but whatever is being baked in might be overly discounting the stock."

On Tuesday, Miami-based Lennar said that it now expects fourth-quarter adjusted EPS of between 70 cents and 75 cents, versus guidance of $1.00 to $1.30 it offered when reporting fiscal third-quarter earnings on Sept. 26.

Salamone also likes Ryland Group Inc., WCI Communities Inc. and KB Home.

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