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Skeptics Unfazed by Rackspace Hosting's Strong Price Action

RAX has notched considerable gains, so why all the pessimism?

by 1/4/2013 10:15 AM
Stocks quoted in this article:

Rackspace Hosting, Inc. (NYSE:RAX - 75.38) has been an overachiever in terms of technical performance, boasting a year-over-year advance of close to 80%, as well as a six-month climb of about 67%. The equity has also outpaced the broader S&P 500 Index (SPX) by nearly 12 percentage points during the past 60 sessions. In fact, the stock tagged a new record high of $77.13 on Thursday, with RAX on pace to finish yet another week atop its 10-week and 20-week moving averages -- the latter of which hasn't been breached on a weekly closing basis since early August.

Despite this technical prowess, however, the equity's bearish camp remains quite crowded. Data pulled from International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 50-day put/call volume ratio of 3.16 for RAX, confirming puts bought to open have more than tripled calls during the last few months. This ratio ranks higher than 77% of comparable readings collected within the past year, meaning traders have picked up puts over calls at an accelerated clip.

Meanwhile, although short interest on the cloud computing firm declined by nearly 8% during the past two reporting periods, these bearish plays still account for a lofty 10% of RAX's available float. In fact, it would take more than nine days to cover these shorted shares, at the stock's average daily trading volume. Should the skeptics continue to unwind their pessimistic bets, it could lead to a contrarian boon for the security.

Also of note, there are still a number of holdouts among the brokerage bunch. Among the 17 covering analysts, only nine have deemed RAX worthy of a "buy" or better recommendation, while the remaining eight maintain lukewarm "hold" suggestions. Even more telling, Thomson Reuters shows an average 12-month price target of $71.33 for the security, representing a discount to yesterday's closing price of $75.38. This leaves the door wide open for future upgrades and/or price-target hikes, which could push the shares even higher.

Weekly Chart of RAX since June 2012 With 10-Week and 20-Week Moving Averages


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