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Tuesday Tumble: Marathon Oil Corporation (MRO)

Why we think MRO is vulnerable from a contrarian perspective

by 1/21/2014 1:25:44 PM
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Every week in the Tuesday Tumble, we explore a potentially overloved stock that may be vulnerable going forward, from a contrarian perspective. This week, our choice is energy issue and S&P 500 Index (SPX) component Marathon Oil Corporation (NYSE:MRO).

The past year has not been particularly kind to MRO. Despite a bull market, the company's stock is up only about 3% to wink at the $34.04 level. While the shares did hit a multi-year high of $38.18 as recently as Nov. 21, they've shed nearly 11% since that point. If that's not enough, Marathon Oil is also sitting below a layer of resistance at its descending 20-day moving average, above which the shares have not closed since early December.

Nevertheless, option traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) are smitten with the energy name. During the past 10 sessions, MRO has racked up an ISE/CBOE/PHLX call/put volume ratio of 15.84, with long calls outstripping their bearish counterparts by a margin of nearly 16-to-1. For comparison's sake, the ratio checked in at just 4.31 on Jan. 2; it also registers in the 93rd percentile of its annual range.

Digging deeper, peak front-month call open interest for MRO belongs to the 36 strike, where 10,251 contracts reside -- a healthy proportion of which were bought to open. Should those bullish bets begin to unwind as February options expiration draws closer, the shares may run into some contrarian headwinds.

Meanwhile, outside of options land, the Street is extremely bullish on Marathon Oil. Of the 16 analysts covering the shares, 12 have given them a rating of "buy" or better, versus just four tepid "holds" and not a single "sell" or worse recommendation. What's more, the consensus 12-month price target of $42.32 stands at a 24% premium to the current stock price. Consequently, if MRO continues to struggle on the charts, the equity could get hit with a series of analyst downgrades and/or price-target reductions.

Finally, on the fundamental front, Marathon Oil Corporation (NYSE:MRO) is due to report fourth-quarter earnings after the market closes on Wednesday, Feb. 5. The security could run into problems here, as well, since it's missed analysts' bottom-line estimates in four of the past eight quarters -- resulting in an average single-week loss of 3.7%.

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