The strength small-caps has exhibited has been noted a number of times during this week of relatively modest price action among the larger indexes. Specifically, the Russell 2000 (RUT) has tacked on 1.9% during the past five sessions, versus a 0.4% gain for the S&P 500 Index (SPX) and a 0.5% loss for the Dow. Three underappreciated names in this outperforming sector that could offer up contrarian plays are for-profit educator ITT Educational Services, Inc. (NYSE:ESI), oil and gas concern Forest Oil Corporation (NYSE:FST), and rare earths specialist Molycorp Inc (NYSE:MCP). As of Wednesday's close, the market capitalization for these three companies was $716.94 million, $724.05 million, and $1.21 billion, respectively.
ITT Educational Services, Inc. (NYSE:ESI) had a slow start to the year, but in late April, the stock climbed north of its 10-week moving average, and has since been riding higher atop this trendline. This upward trajectory has not only brought the equity to a year-to-date gain of roughly 77%, but also above $30 -- a round-number level that previously served as resistance.
Despite this technical tenacity, puts have been popular in ESI's options pits. In fact, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.46 ranks in the 93rd percentile of its annual range, suggesting short-term speculators have rarely been more put-heavy toward ESI during the past 52 weeks. In the front-month series, the October 25 strike is home to peak put open interest of 3,043 contracts -- a number of which have been bought to open. Given the deep out-of-the-money status of the puts, as well as the stock's formidable price action of late, a portion of this activity could represent shareholders picking up options-related protection against a pullback.
Looking elsewhere on the Street reveals a skeptically slanted bias toward ITT Educational Services. Among covering analysts, no fewer than nine out of 11 maintain a "hold" or "strong sell" suggestion toward the equity. Plus, the consensus 12-month price target of $22.56 represents a steep discount to the stock's current perch at $30.53. From a contrarian perspective, a round of upgrades and/or price-target hikes could add fuel to the shares' fire, should ESI continue with its upward trajectory.
Forest Oil Corporation (NYSE:FST) has been in rebound mode since sinking to a 17-year low of $3.77 in late June, with the shares up nearly 67% to linger near $6.29. What's more, over the past 60 sessions, the stock has outperformed the broader S&P 500 Index (SPX) by more than 43 percentage points. Thanks to the recent sale of a portion of its Texas-based Permian Basin, the security managed to muscle back above $6 -- an area that hadn't been explored since March.
There's been a wave of bearish activity in FST's options arena, though, per data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Throughout the last two weeks, the equity has chalked up a 10-day ISE/CBOE/PHLX put/call volume ratio of 3.24 (a marked rise from the Sept. 3 reading of 0.01). The current ratio ranks in the 90th percentile of its annual range, indicating puts have been bought to open over calls at a near-annual-high clip. This penchant for puts -- especially the out-of-the-money kind -- could translate into options-related support for Forest Oil in the near term.
Molycorp Inc (NYSE:MCP) has had a strong September, with the stock up 18% month-to-date to trade at $7.20. The stock's technical determination was witnessed last Thursday, when MCP managed to close north of its 200-day moving average for the first time since early August. MCP extended its lead over this psychologically significant trendline earlier this week, after reports surfaced that China may be upping its exposure to rare-earth minerals.
Not everyone on the Street is convinced that MCP is able to sustain this upward momentum, though. Short interest edged up 2.8% during the last two reporting periods, and now accounts for a brow-raising 36.3% of the security's available float. It would take close to three weeks to cover these shorted shares, at MCP's average daily trading volume. In other words, there is plenty of sideline cash available to spark a short-covering rally, should any of the bears jump ship in the face of the equity's positive price action. As my colleague Beth Gaston noted yesterday, recent call activity in MCP's options pits could be a result of nervous shorts hedging.
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