Wall Street Grows More Optimistic About Aeropostale Inc. (ARO)

The shares of Aeropostale (ARO: sentiment, chart, options) could see a nice boost this morning following a couple of positive broker comments. To kick the day off, Barclays Capital upgraded the security from "underweight" to "equal weight." Meanwhile, Wedbush raised its price target for ARO from $23 to $24, while reiterating its "buy" rating on the shares.

Overall, Wall Street is relatively skeptical of the trendy teen retailer. Zacks reports that the stock has earned 6 "buy" ratings and 11 "holds," leaving ample room for additional upgrades. What's more, the average 12-month price target for ARO stands at $24.22, according to Thomson Reuters. This estimate implies that analysts are looking for a rally of only 5% during the next 12 months. Any price-target increases from this reluctant bunch could help to boost the shares sharply higher.

In other news, the company announced earlier this week that it plans to close its Jimmy'Z concept, which includes 11 stores, to focus on its core business. Aeropostale said it would shutter the stores in the second quarter of fiscal 2009, which ends in July. Furthermore, ARO will roll out its next retail concept to target a younger demographic.

During the first half of fiscal 2009, Aeropostale expects to incur a charge of about $5 million related to lease terminations, inventory liquidation, and employee retention and severance obligations. The company expects the actions to result in ongoing savings of about $8 million, or 7 cents per share.

Technically speaking, the shares have been on a tear, skyrocketing past their peers in the retail sector. The stock has gained more than 43% since the start of 2009. In fact, the security has soared from its December low of $12.52, gaining more than 84%. During this time frame, ARO has been guided higher by its 10-day and 20-day moving averages.

From a longer-term perspective, the stock has climbed above resistance at its 10-week and 20-week moving averages. These trendlines had served as resistance from mid-September through late December, and could now act as a layer of support, lifting the shares higher. The next potential layer of resistance lies at the 26 level -- site of the equity's 10-month and 20-month moving averages. The last time ARO posted a monthly close above both of these long-term trendlines was in September 2008.

Despite the stock's stellar technical performance, sentiment among investors is overwhelmingly bearish. The Schaeffer's put/call open interest ratio for ARO stands at 2.09, as put open interest more than doubles call open interest among near-term options. This reading is also higher than 99% of all those taken during the past year, indicating that investors have been more bearish toward the shares just 1% of the time.

We can also see the preference for puts in the stock's March open interest configuration. Peak put open interest sits at the out-of-the-money 20 strike, with more than 3,500 contracts. On the other hand, peak call open interest resides at the out-of-the-money 25 strike, with just 2,500 contracts. This bearish skew in the security's open interest configuration indicates that short-term options speculators have low expectations for the shares.

Short sellers have also flocked to the equity in an effort to call a top to the stock's gains. During the past 2 weeks, the number of ARO shares sold short has increased by 5% to 8.4 million. This accumulation of bearish bets accounts for 12.7% of the company's total float and is 4 times the stock's average daily trading volume. An unwinding of these pessimistic positions in the face of the security's uptrend could add more buying pressure to the shares.

Overall, this combination of massive pessimism with the stock's strong technical performance has bullish implications from a contrarian perspective. Should the bears begin to unload their short positions and jump on the equity's bandwagon, ARO could enjoy a fresh boost of buying pressure.

A bull? A bear? Conservative? Aggressive? No matter what kind of investor you are, option trading offers you tools to enhance and protect your portfolio. Learn how from Bernie Schaeffer, the highly respected equities and option market veteran. Bernie's home study course will show you how to leverage relatively small amounts of capital into big profits -- in just 10 days. Includes CD, DVD, and other extras. Click here to learn more.