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Option Idea of the Week: Computer Sciences

CSC could have more contrarian fuel in the tank

by 12/7/2012 11:29 AM
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Information technology concern Computer Sciences Corporation (NYSE:CSC - 38.70) has flexed both fundamental and technical muscle over the past few months. However, despite outperforming the broader S&P 500 Index (SPX) by more than 26 percentage points during the last 40 sessions, the stock remains mired in skepticism. As such, CSC's solid corporate backdrop and encouraging price action, juxtaposed with the lingering negativity on Wall Street, could point to a potential opportunity for contrarian bulls.

On the charts, CSC has stair-stepped roughly 75% higher since touching an annual low of $22.18 in late July, and tagged a fresh 18-month peak of $40.34 earlier this week. Supporting the security's most recent leg into the black has been its 10-day moving average, a pullback to which could signal an opportune entry point to gamble on more upside.

Daily Chart of CSC since July 2012 With 10-Day Moving Average

Off the charts, the company earlier this week agreed to sell its credit-services unit to Equifax Inc. (NYSE:EFX) for $1 billion in cash. The firm said it will use up to $400 million of that to buy back stock. The deal -- which CSC says will enable it to put more focus on its core business -- is expected to close by the end of the year.

While CSC shareholders celebrated the news by launching the stock into new-high territory, there are still plenty of pessimists on Wall Street. In fact, just one-third of the analysts following the equity deem it worthy of a "buy" or better rating, leaving the door wide open for future upgrades to propel CSC even higher.

In the same vein, the consensus 12-month price target sits at $37.95, representing a discount to CSC's closing price of $38.77 on Thursday, and pointing to potential price-target hikes on the horizon.

Elsewhere, option traders have bought to open almost five CSC puts for every call during the past couple of months, as evidenced by the stock's 50-day put/call volume ratio of 4.88 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Even more telling, perhaps, this ratio sits just two percentage points from a 12-month peak. Or, in simpler terms, option buyers have initiated bearish bets over bullish at a near annual-high clip during the past 50 sessions. An unwinding of skepticism in the options arena could add fuel to CSC's fire.

Investors expecting more long-term gains for CSC should consider buying the stock's in-the-money June 32-strike calls, which were last asked at $8.20.


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