Schaeffer's Trading Floor Blog

Weekly Contrarian: VeriFone Bulls Turn a Blind Eye to Technical Troubles

Wall Street takes a glass-half-full approach to PAY, despite its underperforming ways

by 9/19/2012 9:36 AM
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Publication title: Apple Could Kill Off VeriFone
Publication date: 9/18/2012

Brief Summary

The author contends that the advent of mobile payments could put the future of electronic processors -- such as VeriFone Systems Inc (NYSE:PAY) -- in jeopardy, as customers continue to seek convenience and ways to save time. Additionally, with our increasing reliance on cell phones, mobile payments are projected to be the "world's currency by 2016."

Highlighting "the recent phenomenon," heavyweight Wal-Mart Stores, Inc. (NYSE:WMT) has called upon Apple Inc. (NASDAQ:AAPL) to test a mobile payment system using the iPhone as a means of cutting into its massive cashier costs. The author insists this could pave the way for other influential retailers to follow suit -- pushing PAY to either "adapt or die."

Plus, the author believes the stock is pricey, especially considering its not-so-transparent relationship with shareholders. While the author accepts that PAY has the ability to adapt, he questions whether or not the company can do so against a tech titan like AAPL without endangering its existing business.

Contrarian Takeaway

PAY has struggled on the charts for some time, with the shares shedding nearly 17% of their value over the past 52 weeks. What's more, since hitting an annual high of $55.89 on April 19, the stock has surrendered more than 41%. In fact, after providing a weaker-than-expected fourth-quarter sales outlook on Sept. 5, the equity gave back 13.7% throughout the next session.

Despite PAY's technical and fundamental woes, speculators have been clamoring for calls in the options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open 2.97 calls for every put during the past 50 sessions. This ratio ranks just nine percentage points from a 52-week peak, indicating bullish bets have been scooped up over bearish at a near annual-high clip in recent months.

Echoing this trend is PAY's Schaeffer's put/call open interest ratio (SOIR) of 0.64, which shows call open interest outweighs put open interest among options with a three-month shelf life. Plus, this ratio ranks in the 32nd percentile of its annual range, suggesting short-term speculators are more call-heavy than usual.

Sentiment has remained strong outside of the options arena, as well. The stock currently sports six "strong buy" and two "buy" recommendations, compared to four "holds" and one "strong sell". Additionally, the consensus 12-month price target of $43.77 represents a 33% premium to its closing price of $32.79 on Tuesday, Sept. 18. Should PAY continue to struggle on both the technical and fundamental fronts, a round of downgrades and/or price-target cuts could create some contrarian headwinds for the stock in the near term.

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