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Why Wall Street's Neglect of HCP Could Spell Opportunity

Eyeing a potential contrarian option play on HCP

by 7/5/2012 12:27:55 PM
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Despite outperforming the broader equities market, real estate stocks remain extremely under-loved on Wall Street. According to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White, 93% of stocks under the "real estate" umbrella were trading north of their psychologically significant 200-day moving averages on July 3 -- topping all others sectors by a country mile. Nevertheless, just 41% of analysts offer up "buy" or better ratings, suggesting the bulls are still neglecting this group -- and pointing to a potential contrarian opportunity. Near the top of this list of underappreciated outperformers was HCP, Inc. (NYSE:HCP - 44.15), a real estate investment trust (REIT) focused on the healthcare industry.

Starting with a look at the charts, HCP has added more than 53% since dropping to the $28.76 level a little less than a year ago. Guiding the equity into the black have been its 10-week and 60-week moving averages, which have acted as support for the better part of three years. More recently, HCP has outpaced the broader S&P 500 Index (SPX) by 16.6% during the past 60 sessions, touching a new all-time high of $44.79 earlier this week.

 Weekly Chart of HCP since July 2009 With 10-Week and 60-Week Moving Averages

As alluded to earlier, though, Wall Street remains wary of uptrending HCP. Short interest jumped nearly 10% during the past month, and now represents nearly a week's worth of pent-up buying demand, at the security's average daily trading volume. Going forward, this abundance of bearish bets points to ample fuel for a short-covering rally, should the skeptics abandon ship in the wake of HCP's quest for new highs.

Elsewhere, regardless of the stock's technical prowess, only three analysts offer up "buy" or better endorsements. On the flip side, HCP has been plagued by eight tepid "holds" and four "sell" or worse suggestions. As the equity continues to power higher on the charts, a flood of upgrades could lure even more buyers from the sidelines.

In the same vein, the average 12-month price target among analysts stands at a paltry $40.50, representing a significant discount to HCP's closing price of $44.65 on Tuesday. A round of price-target boosts could also lend contrarian fuel to the stock's fire.

Over in the options pits, peak put open interest rests at the out-of-the-money July 40 strike, with nearly 2,300 contracts in residence. In the short term, this bounty of pessimistic positions could translate into an added layer of options-related support for HCP.

And speaking of HCP options, the security's Schaeffer's Volatility Index (SVI) of 16% stands just three percentage points from an annual low. In other words, the stock's short-term options are relatively inexpensive at the moment -- making now an opportune time to jump in on HCP's longer-term uptrend. Traders expecting more upside from HCP may want to consider the stock's October 40 call. (However, note that the company is slated to report earnings on July 31 -- within the option's lifetime.)


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