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Small-Cap Standout: Alon USA Energy, Inc. (ALJ)

Skepticism surrounds ALJ, despite a recent demonstration of technical strength

by 1/2/2014 10:19:04 AM
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Profitable opportunities within the small-cap sector are often overlooked, as investors focus their attention on flashier mid- and large-cap names. However, we found three equities that fall under the small-cap umbrella -- those with a market valuation ranging between $300 million and $2 billion -- that could offer up contrarian plays, including petroleum producer Alon USA Energy, Inc. (NYSE:ALJ), LED specialist Universal Display Corporation (NASDAQ:OLED), and automatic kiosk concern Outerwall Inc (NASDAQ:OUTR). As of Tuesday's close, the market capitalizations for these three companies stood at $1.04 billion, $1.58 billion, and $1.83 billion, respectively.

After hitting an annual high of $39.74 on Nov. 21, Universal Display Corporation (NASDAQ:OLED) pulled back to its 200-day moving average, and bounced on Dec. 12. The shares have since added roughly 9% to trade at $34.00. Meanwhile, short interest declined 0.9% in the latest reporting period, but still accounts for more than 25% of the stock's available float, translating into nearly 14 sessions' worth of pent-up buying demand. An additional unwinding of these bearish bets could help OLED move higher.

Outerwall Inc (NASDAQ:OUTR) had some wild price swings in 2013, but finished the year 29.3% higher to settle at $67.27. Option players, however, have bought to open nearly two puts for every call on OUTR during the past two weeks. The resulting 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 1.96 ranks above 86% of other such readings taken in the past year. An unwinding of these bearish bets -- particularly at out-of-the-money strikes -- could provide a layer of options-related support for OUTR down the road.

Alon USA Energy, Inc. (NYSE:ALJ) has been on a technical tear in recent months, with the shares up 95% from their Oct. 9 annual low of $8.55. Assisting the stock in its trek higher has been its 10-day moving average, which also served as a foothold during an early December pullback.

Options traders are not convinced the equity can sustain this upward momentum, though. ALJ's 10-day ISE/CBOE/PHLX put/call volume ratio of 0.64 (up from its month-ago reading of 0.41) ranks in the 88th percentile of its annual range. In other words, puts have been bought to open over calls with more rapidity just 12% of the time within the past year.

This skepticism is witnessed elsewhere, as short interest grew 6.8% in the latest reporting period, and now accounts for a brow-raising 28.5% of the stock's available float. It would take 7.5 sessions to cover these shorted shares, at the equity's average pace of trading, pointing to an ample amount of sideline cash available. A capitulation by these bearish bettors could translate into a contrarian boon for Alon USA Energy, should the security continue to move up the charts.

Finally, of the seven analysts covering the stock, six maintain a "hold" or "strong sell" suggestion toward Alon USA Energy, Inc. (NYSE:ALJ), compared to one lone "strong buy." Plus, the consensus 12-month price target of $16.84 stands at a slim 2.9% premium to the equity's current perch at $16.36. ALJ could see some analyst-induced gains on the horizon, should any of these doubters follow in the footsteps of Goldman Sachs, which raised its price target for the security to $25 from $24 on Dec. 16.

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