Schaeffer's Trading Floor Blog

Weekly Contrarian: Expansion Efforts Could Frighten FedEx Skeptics

Despite a steady year-over-year advance, pessimism is steep toward FDX

by 9/12/2012 10:31 AM
Stocks quoted in this article:

Publication: Barron's
Publication title: Is FedEx Boxed In?
Publication date: 9/05/2012

Brief Summary

"With rising fuel costs, declining volume, a struggling global economy and earnings apparently near a peak, investors should steer clear of FedEx shares for now," cautions the author. Specifically, weakness in China, analyst downgrades, and contracting margins are all red flags of concern leading up to FedEx Corporation's (NYSE:FDX) fiscal first-quarter results, due out Sept. 18. The company recently warned earnings will arrive well below what was previously forecast.

The author does concede that shares of FDX are arguably appealing at current levels, but contends most cyclical stocks are when earnings are elevated. With so much fundamental uncertainty surrounding the company, concludes the author, FDX may be one to bypass at the moment.

Contrarian Takeaway

Technically, FDX has charted a steady path higher over the past 52 weeks, adding more than 18% in that time. More recently, the stock has been committed to the $86-$92 trading range. However, the bottom of this range has been protected by FDX's 50-week moving average. This trendline has contained all but one weekly close since early January.

The general sentiment around the Street seems to agree with the author's dreary outlook. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 134 puts for every 100 calls over the past 10 sessions. Plus, this ratio ranks higher than 74% of other such readings taken in the last year, indicating bearish bets have been scooped up over bullish at an accelerated clip in recent weeks.

This penchant for puts is even more telling among short-term speculators, as evidenced by the stock's Schaeffer's put/call open interest ratio (SOIR) of 1.62. This ratio, which shows near-the-money put open interest nearly doubles call open interest among options with a three-month shelf life, ranks in the 93rd percentile of its annual range. In other words, near-term traders have been more put-heavy only 7% of the time over the past 12 months.

Outside of the options pits, short sellers increased their bearish exposure by 26.2% during the latest reporting period, and short interest is now docked at its highest level of the year. Additionally, it would take more than four days to cover these shorted shares at FDX's average daily pace of trading.

From a contrarian perspective, FDX could be poised for some tailwinds in the near term. No fewer than six uncertain analysts still maintain a tepid "hold" suggestion toward the stock, despite its technical durability. A capitulation from these doubters, should FDX continue to trek up the charts, could prompt some of the weaker bearish hands to jump ship.

In fact, on Tuesday, Sept. 11, FedEx and sector peer United Parcel Service, Inc. (NYSE:UPS) flashed their fundamental cards, when the two companies announced they received approval to expand their express-package services in China. FDX ended higher on the day.


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