Schaeffer's Trading Floor Blog

Weekly Contrarian: DreamWorks Animation SKG, Inc. (DWA) Looks East

A change of heart on Wall Street could be a boon for underloved DWA

by 6/6/2013 2:50 PM
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The future of movies is in China, DreamWorks Animation SKG, Inc. (NASDAQ:DWA) CEO Jeffrey Katzenberg told CNBC. "In probably about four years or so it will be the number one market in the world," he said. As such, the film studio is looking to up its presence in the country, which sees about 10 new movie screens open every day, according to the Beijing-based interviewer.

But what makes DWA -- responsible for "The Croods," which is the top animated movie of all-time in China, Katzenberg says -- unique from other Hollywood studios reaching East? It wants to build a "Chinese family-branded entertainment company" that makes products in China, for China. As the people become more involved in the creative process, it'll be "in their best interest to protect that work." In other words, he's optimistic about anti-piracy enforcement, which is a problem currently plaguing the nation and movie industry.

Contrarian Perspective

On the charts, DWA has been a standout, outperforming the broader S&P 500 Index (SPX) by more than 19 percentage points during the past three months. In fact, the equity is flirting with year-to-date highs, and is poised to close the week north of $22. This level has rejected most of DWA's advances since mid-2011, but could now switch roles to serve as support.

Despite the company's fundamental and technical promise, though, sentiment remains decidedly bearish. Just two out of 10 analysts offer up "buy" or better endorsements -- leaving plenty of room for potential upgrades to lure more buyers to the table. Meanwhile, short interest accounts for nearly 30% of DWA's total available float, representing more than 16 sessions' worth of pent-up buying demand, at the security's average pace of trading. A short-squeeze situation could also add contrarian fuel to the fire.

In the same vein, the Schaeffer's put/call open interest ratio (SOIR) of 1.66 indicates that puts outnumber calls among options expiring within three months. Even more telling, this ratio stands higher than 96% of all other readings of the past year. In simpler terms, near-term options players have rarely been more put-heavy. An unwinding of pessimism in the options pits could translate into more upside for DWA.

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