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Why Investors Should Be Wary of NVIDIA

Wall Street continues to love NVDA, despite technical woes

by 10/18/2012 10:12 AM
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Here at Schaeffer's Investment Research, we utilize Expectational Analysis when examining potential options trading opportunities. That is, we analyze not only the technical and fundamental aspects of a stock, but also the sentiment surrounding an equity. We have come to find that when a security performs well technically but is plagued by pessimism, it can often be a powerful bullish indicator, from a contrarian perspective. The opposite is true with underperforming stocks surrounded by optimism.

NVIDIA Corporation (NASDAQ:NVDA - 12.86) is a perfect example of an overloved name despite its technical troubles. The stock has had a rough way to go on the charts lately, considering its year-over-year loss of about 14%, as well as its year-to-date loss of nearly 8%. The equity has also underperformed the broader S&P 500 Index (SPX) by roughly 14 percentage points during the past 40 sessions. What's more, the security continues to trade below its 20-day moving average -- a trendline it has conquered just once on a daily closing basis late August.

Yet, for all of these technical troubles, NVDA remains in good standing with Wall Street. In fact, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have bought to open nearly seven calls for every put during the past two weeks. This 10-day call/put volume ratio of 6.74 ranks higher than 79% of comparable readings gathered during the past year, denoting a more-bullish-than-usual skew among options buyers lately.

In a similar vein, NVDA's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.33, confirming calls roughly triple puts among options scheduled to expire within the next three months. This ratio registers in only the 17th percentile of its annual range, meaning short-term traders have rarely been more call-heavy toward the security during the last 12 months. Digging even deeper into the data, it appears that the overhead 14 and 15 strikes are home to notable call open interest in the October and November series of options. This heavy accumulation of optimistic bets could translate into options-related resistance moving forward.

In terms of analyst coverage, 20 of the brokerage firms covering NVDA maintain middling "hold" ratings. However, a surprising number of analysts -- 11, to be exact -- have issued "buy" or better recommendations for the graphic chip maker. Meanwhile, only one "strong sell" suggestion has been handed out. Furthermore, Thomson Reuters pegs the equity's average 12-month price target at $17.05 -- a level not touched since June 2011. This lofty figure represents expected upside of roughly 31% to Wednesday's closing price of $13.06. This bounty of optimism among the brokerage bunch leaves plenty of room for future downgrades and/or price-target cuts, which could pressure the stock even lower.


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