The Contrarian Blog

Wall Street Rolls the Dice on WMS Industries

by Jim Cunningham 11/10/2011 5:15 PM
Stocks quoted in this article:
Publication: "Barron's"
Publication title: "Why WMS Is Worth a Spin"
Publication Date: 11/8/2011
Brief Summary:

Although WMS Industries (WMS) posted weaker-than-expected fiscal first-quarter earnings on Nov. 7, this Barron's article offers a long-term optimistic outlook for the beleaguered slot machine maker. The author claims that WMS has plenty to offer patient and willing investors, including the forthcoming release of seven new games and an "enviable stable of exclusively licensed brands."

A couple of analysts are also highlighted in the story. As one analyst points out, "The longer-term picture [for WMS] should improve owing to the expectation of regulatory approvals and a refreshed installed base for its gaming operations."

Contrarian Takeaway:

WMS Industries has been a virtual bust on the charts. Since skimming the $48 level in January, the security has surrendered nearly 60% of its value, falling steadily lower under the direction of its 10- and 20-week moving averages. Furthermore, the shares of WMS are set to end the week beneath the round-number $20 level, which has acted as support for the past several weeks, and could now switch roles to serve as resistance.

Elsewhere, the options crowd appears to be optimistic toward WMS, as evidenced by the 10-day call/put volume ratio of 55.29 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio arrives seven percentage points from an optimistic peak, signaling that traders on these exchanges have rarely purchased bullish bets over bearish at a faster pace during the past year.

But this recent preference for calls may not be as optimistic as it would initially seem, as short interest for WMS jumped 80.2% during the most recent reporting period. With buy-to-open call volume and short interest rising together, it's possible that short sellers are picking up optimistic options to hedge their pessimistic positions. Yet, the bearish bandwagon is far from crowded. At WMS' average pace of trading, it would take just over three sessions to buy back all of these shorted shares.

Meanwhile, Zacks tallies six "strong buys," 11 "holds," and not a single "sell" among the brokerage bunch. In fact, Thomson Reuters places the average 12-month price target at $24.38, which represents a 33% premium to Thursday's close of $18.27.

Should the stock extend its year-to-date slump, an unwinding of optimism in the options pits, or a round of negative analyst attention, could translate into a contrarian headwind for the shares, making things even worse for WMS.

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