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A Closer Look at IAC/InterActiveCorp, AOL, and Demand Media

Eyeing potential contrarian option plays on Internet media stocks IACI, AOL, and DMD

by 4/25/2012 12:41:12 PM
Stocks quoted in this article:

With Facebook's public trading debut just around the corner, there's a growing buzz surrounding Internet stocks. Among the broader group, there are some interesting potential contrarian opportunities emerging among online media names. This week, let's check out the prospects for sector peers IAC/InterActiveCorp (IACI - 46.66), AOL, Inc. (AOL - 24.65), and Demand Media, Inc. (DMD - 7.10).

IAC/InterActiveCorp (IACI)

IACI has been trending steadily higher since the March 2009 market bottom, with the stock more than doubling in value over this time frame. The shares have retreated from a recent test of the round-number $50 level, but IACI is still perched firmly above support at its 80-day and 120-day moving averages. These trendlines have contained the equity's pullbacks for the better part of two years, guiding IACI to a gain of roughly 35% over the past 52 weeks.

 Daily Chart of IACI since June 2010 With 80-Day and 120-Day Moving Averages

However, there's plenty of skepticism levied against this outperformer. IACI's Schaeffer's put/call open interest ratio (SOIR) checks in at a top-heavy 3.66, indicating that puts nearly quadruple calls among options slated to expire within three months. This ratio arrives in the 72nd percentile of its annual range, as short-term options players are more put-heavy than usual.

This skeptical slant is confirmed by the equity's 10-day put/call volume ratio of 20.77 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This reading arrives in the 95th annual percentile, suggesting that speculators have scooped up puts over calls at a faster pace only 5% of the time during the past year.

Short sellers are also piling on, as evidenced by a 19.3% surge in short interest during the most recent reporting period. However, these bearish bets account for a relatively tame 3.6% of IACI's float.

There's also room for sentiment to improve among analysts, since five brokerage firms out of 11 maintain a middling "hold" rating on the stock. Any upgrades from this group could help to spark a capitulation by some of the weaker bearish hands, which could help IACI continue its long-term ascent.

Traders betting on additional upside for IACI may want to consider the July 40 call.

AOL, Inc. (AOL)

Shares of AOL gapped higher in early April following a lucrative patent deal with Microsoft (MSFT). This bullish spike effectively propelled the shares north of potential resistance in the $19-$20 neighborhood, which had previously served as support during 2010 and 2011. AOL has since pared some of its heady gains, but the $24 level has emerged as post-gap support -- and the stock is still up about 63% year-to-date, outpacing the major equity indexes by a huge margin.

 Daily Chart of AOL since September 2011

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