Schaeffer's Options Center

Shortly after the opening bell, brokerage firm Credit Suisse offered some opinions on the retailing sector, and the reviews were not positive. Citing valuation concerns, the firm downgraded both Kohl's (KSS: sentiment, chart, options) and Nordstrom (JWN: sentiment, chart, options) to "neutral" from "outperform" and reduced its rating on J.C. Penney (JCP: sentiment, chart, options) to "underperform" from "neutral."

In an accompanying statement, Credit Suisse noted that: "We simply believe that valuations for these stocks appear full and that investor expectations are unlikely to rise given an increasingly uncertain consumer economy."

The subsequent fallout has been moderate. JWN shares are currently down 1.5 percent, KSS is off 2.2 percent, and JCP has retreated 1.9 percent. The AMEX Retail HOLDRs Trust (RTH: sentiment, chart, options) is actually showing a fractional gain.

Continuing along this week's look at companies that dabble in scholastic achievement, I thought I'd bury my nose in some information about the nation's leading (publicly traded) textbook publishers and vendors from an educated investor's point of view. What I found, turns out, wasn't exactly worthy of best-seller numbers. The smaller houses that primary deal with educational materials are currently lacking in vigor, while the representative equities of the big-box bookstores are also struggling. So, the book report these days is a collectively bearish one; are there any issues in the sector that represent better short plays than the others?

Barnes & Noble

Earlier this month, Barnes & Noble (BKS: sentiment, chart, options) ventured into the earnings confessional to announce a second-quarter sales decline of 1.3 percent. Per-share earnings results rose to 24 cents, outpacing analysts' expectations by a penny per share. Looking forward, the retailer expects comparable-store sales to be flat or post a very modest increase in the third quarter, while that reporting period's per-share loss is on pace at four to eight cents. For the full year, BKS expects to profit by $2.20 to $2.30 per share, surrounding Wall Street's current outlook of $2.27 per share.

From a technical perspective, the most disconcerting thing about BKS is its violation of a long-term uptrend, which had been in place since early 2003. In June, the stock endured its first monthly close beneath its 10-month and 20-month moving averages since April 2003. The shares have spent the ensuing three months shuffling beneath these long-term trendlines, which are themselves on the verge of a bearish crossover. Should this technical phenomenon occur, it will be the first such crossover since June 2002.

Another thing that concerns me about BKS shares is the losing intermediate-term battle the equity has waged with its 20-week moving average. After spending much of the spring consolidating into this trendline, the shares slipped below and have yet to recover. A brief rally on the heels of its recent earnings report drove the stock above its 10-week moving average, but the 20-week trendline was quick to thwart any continued upside, effectively undoing the majority of the security's gains.

If I were to recommend a short play on BKS, it would be purely on a technical basis, as its sentiment indicators aren't lining up exactly right for an ideal contrarian play. Sentiment is on neutral ground, which is typically to be expected on a stock which sees its price action struggling. (Remember that a perfect Expectational Analysis ^® recipe features sentiment that runs counter to the price trend in the underlying stock or sector). While we aren't seeing a whole lot of optimism toward BKS, we aren't seeing extremes in pessimism either, so there is still the potential for future downside.

For example, Wall Street is balancing carefully on the fence, as six of the seven analysts following BKS have named it a "hold." While the possibility for upgrades is basically equal to the chance for downgrades, continued technical struggles from the shares could send a bearish ripple through this unbiased bunch.

Similarly, the short-interest picture is not one from which to draw many conclusions. The number of shorted BKS shares dropped 12.5 percent in the August reporting period, leaving the stock with a middle-of-the-road short-interest ratio of 3.3 days to cover. A short-covering rally is hardly likely with these numbers, but there isn't exactly an outright drought of shorted shares, either. In fact, more than five percent of the security's float has been sold short.

Keep an eye on the equity's trendlines. Another failed charge at the 20-week could be a valid entry point for a short-term short position.

John Wiley & Sons

According to Hoover's, John Wiley & Sons (JW'A: sentiment, chart, options) publishes scientific, technical, and medical works, including journals and reference texts. The company also publishes professional trade books (including The Option Advisor) as well as college textbooks. In its mid-June earnings outlook, the company estimated that fiscal year 2007 revenue would grow in the mid-single digits, while earnings growth is targeted for the high-single digits.

Like BKS, my initial cause for concern with JW'A was its long-term graph, which reveals an unambiguous reversal of a long-term uptrend. The stock first closed beneath its team of 10-month and 20-month moving averages in April and has journeyed lower ever since. These trendlines completed a bearish crossover earlier this summer, suggesting the likelihood of future downside pressure.

Additionally, the shares are also head-butting against their 20-week moving average, which was breached in early October 2005 shortly after JW'A shares slipped beneath their 10-week trendlines. So far this week, the stock has failed to make any headway on the north side of this its 20-week.

The stock is not currently an optionable commodity, but equity speculators haven't shown much interest in the shares either. According to Short Squeeze.com, just 0.69 percent of the security's float is currently devoted to the short side. This amounts to a piddling short-interest ratio of 1.8 days to cover, offering little hope of a short-covering rally boosting the shares through their 20-week trendline.

McGraw-Hill

Hoover's describes McGraw-Hill (MHP: sentiment, chart, options) as one of the world's leading producers of textbooks, tests, and other educational materials. Through its Standard & Poor's division, the company is also a top supplier of financial information, including index calculation and stock ratings.

In July, MHP reported second-quarter earnings that topped Wall Street's consensus view by a nickel per share, as revenue rose 4.9 percent to $1.53 billion. This news spurred a short-lived rally in the shares, which seems to have petered out during the current trading month. MHP shares have subtly rolled over and are now trading back below their 10-day and 20-day moving averages.

From a long-term perspective, however, MHP looks to still have some life left in it. Since May 2003, the shares have more than doubled in value, benefiting from the support of their 10-month and 20-month moving averages. A test of its 20-month trendline in June proved successful, resulting in a rebound back above its 10-month.

While its technical picture might be more attractive than some of its peers, MHP isn't an ideal long candidate either. Options players are notably optimistic on the stock, which takes away from the wall of worry we like to see in order to prop up an equity. Schaeffer's put/call open interest ratio (SOIR) for MHP currently stands at 0.24, which is lower than 98 percent of the past year's readings.

Additionally, short interest is lackluster on MHP shares, representing less than one percent of the stock's float and equaling a short-interest ratio of 1.5 days to cover. If the stock is able to recover from its recent pullback, it won't be because of any short-covering activity. What's more, it probably won't be catalyzed by any brokerage upgrades. The latest Zacks data find that eight of the 13 brokerage firms following MHP have already assigned "buy" or even "strong buy" ratings on MHP, greatly reducing the odds for any short-term upgrades. All in all, MHP earns a Schaeffer's Equity Scorecard rating of 4.0, which exposes a modest bearish bias on the shares.