3 Small-Cap Standouts Contrarians Should Watch

Skepticism surrounds outperforming Smith & Wesson Holding Corp (NASDAQ:SWHC), ABIOMED, Inc. (NASDAQ:ABMD), and EarthLink Holdings Corp. (NASDAQ:ELNK)

by Karee Venema |

Published on Sep 11, 2015 at 3:25 PM

As has been noted several times, August was a terrible time for the U.S. equities market -- a trend that has spilled over into September. This is evident by the fact that the CBOE Volatility Index (VIX) surged -- and surpassed the volatility measure of small-cap stocks, the CBOE Russell 2000 Volatility Index (RVX), on a number occasions. Per the charts below -- compiled by Schaeffer's Senior Quantitative Analyst Rocky White -- prior to August, this signal had flashed just one other time since 2006, in late 2014.

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What's notable about these multiple signals is that small-caps are usually seen as the riskier asset, as opposed to those stocks on the broader SPX. This role-reversal led to a greater outperformance among some of the smaller-cap stocks -- including gun enthusiast Smith & Wesson Holding Corp (NASDAQ:SWHC), medical equipment maker ABIOMED, Inc. (NASDAQ:ABMD), and network and communications specialist EarthLink Holdings Corp. (NASDAQ:ELNK) -- and the possibility of a contrarian play.

SWHC has had a standout year, nearly doubling in value to its current perch at $18.87. In fact, the shares surged 11.5% in August alone. This positive price action has continued into September, with the security topping out at an eight-year high of $19.22 just yesterday.

Nevertheless, short sellers have been insistent upon upping the bearish ante. Specifically, short interest accounts for 12.5% of Smith & Wesson Holding Corp's available float, or one week's worth of pent-up buying demand, at typical volumes. Should the stock continue to make strides on the charts, a short-covering rally could ensue. Separately, the company will host its annual shareholder meeting next Tuesday, Sept. 15.

ABMD, meanwhile, has almost quadrupled over the past 52 weeks to trade at $95.87. Last month, the equity rallied nearly 24% -- and notched an all-time peak on Aug. 13. After hitting this notable milestone, the equity pulled back to its rising 32-day moving average, a trendline that has provided steady support since June.

Despite this outperformance, the brokerage bunch is still skeptical of ABIOMED, Inc. The majority of analysts covering the shares maintain a "hold" or worse recommendation, while the average 12-month price target of $103.67 is within a stone's throw of current trading levels. A round of upgrades and/or price-target hikes could add fuel to ABMD's fire.

ELNK has also put up strong numbers on the charts, more than doubling since the start of the calendar year. This technical strength was in full view during the month of August, when the shares tacked on 14.3%, and tagged a nearly seven-year high of $9.38 on Aug. 17. More recently, the equity has been lingering near $8.80, just north of its 20-day moving average.

Option traders, however, have been initiating long puts over calls at a faster-than-usual clip of late. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EarthLink Holdings Corp.'s 50-day put/call volume ratio of 0.05 ranks in the 91st annual percentile. Echoing this is the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.48, which rests higher than 71% of all similar readings taken in the past year. An unwinding of these bearish bets could translate into fresh tailwinds for ELNK.

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