Schaeffer's Trading Floor Blog

Weekly Contrarian: Why Vodafone Could Struggle in the Short Term

VOD's dismal price action may encourage contrarian backlash

by 11/14/2012 1:19 PM
Stocks quoted in this article:

In a recent Barron's article entitled Don't Hang Up on Vodafone (exclusive to subscribers), the author argues that despite Vodafone Group Plc (ADR)'s (NASDAQ:VOD) struggling fundamentals, traders shouldn't throw in the towel just yet on the mobile communications concern. In the short term, the author concedes to a taking a cautious stance toward VOD. For starters, the U.K.-based company accumulates roughly 75% of its revenue from European markets, which puts VOD's top line in jeopardy, considering the vast majority of euro-zone nations that are making spending cuts.

Additionally, it was recently announced the company would share in an $8.5-billion dividend payment with Verizon Communications Inc. (NYSE:VZ), courtesy of Verizon Wireless, of which VOD owns a 45% stake. However, VOD revealed this additional cash would be used in variety of ways, as opposed to issuing it wholly as a special dividend to shareholders.

VOD investors should rest easy, though, considering the company already pays shareholders a hefty dividend. Plus, emerging markets, as well as its joint venture with VZ, should prove to be beneficial in the long run. The author insists, "Europe will eventually recover. And Vodafone, which pays a delectable 7% dividend yield (based on cash payments in 2012 after fees and taxes), isn't likely to follow in the footsteps of other European telecoms forced to cut dividend payments." Therefore, this stock "may appeal to patient investors with a stomach for risk and a hunger for income."

Takeaway

On the charts, VOD has been in a steady downtrend in recent months, with the stock shedding more than 17% of its value since hitting an annual high of $30.07 on Aug. 8. Highlighting this dismal price action has been VOD's 10- and 20-day moving averages, which have ferried the stock lower since early October. The equity's technical struggles were showcased in today's session, as well, when VOD plunged to a fresh yearly low of $25.41.

Despite this recent round of chart troubles, the stock is still finding a surfeit of support from Wall Street. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), VOD boasts a 50-day call/put volume ratio of 7.09, which ranks in the 92nd percentile of its annual range. In other words, calls have been bought to open over puts at a near annual-high clip in recent months.

Elsewhere, although short interest rose nearly 30% during the last two reporting periods, it only accounts for 0.2% of the stock's available float. It would take less than a day to cover these shorted shares, at VOD's average daily pace of trading. Simply put, selling pressure is on the rise, but not much sideline cash has been accumulated to give the stock a boost should it attempt a rebound in the near future.

Additionally, the equity currently sports three "strong buy" recommendations, five tepid "holds," and not a single "sell" suggestion among covering analysts. Also, the consensus 12-month price target of $31.70 represents a 23.4% premium to VOD's closing price of $25.69 on Tuesday, Nov. 13. VOD's dismal price action could continue in the short term, with the door wide open for a round of downgrades and/or price target cuts. In fact, the stock is being pressured lower in today's session, following a round of early bearish brokerage notes from the likes of Citigroup and Nomura.


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