Schaeffer's Options Center

Actuant (ATU: sentiment, chart, options) slipped into the earnings confessional this morning to report that fourth-quarter earnings came in at $25.2 million, or 82 cents per share. Excluding items, earnings would have come in at 79 cents per share, as sales jumped 21 percent to $324.6 million. Analysts forecast a profit of 78 cents per share. Looking ahead, ATU boosted its fiscal 2007 outlook to earnings of $3.20 to $3.40 per share on sales of between $1.325 billion and $1.345 billion. This view excludes further costs related to restructuring the European electrical business and future acquisitions. It sees earnings of 78 to 81 cents per share for the first quarter on sales ranging from $325 million to $335 million. The current consensus estimate is for a profit of $3.32 per share in 2007 and 81 cents per share for the first quarter.

The shares have gapped higher and are currently up roughly 5.6 percent. The stock has broken above resistance in the 47 region, which had capped the shares since mid-July.

On Monday, I discussed the ongoing battle for Internet and desktop supremacy between Google (GOOG: sentiment, chart, options) and Microsoft (MSFT: sentiment, chart, options) . Unfortunately, I forgot to mention yet another key player in the Internet realm, former search heavyweight champion and web-portal guru Yahoo! (YHOO: sentiment, chart, options) . Now, just because I didn't mention YHOO in Monday's observation doesn't mean that the company is a small player in the Internet game; in fact, according to Nielsen/NetRatings, YHOO's July searches rose 34 percent from last year, placing it in second place behind GOOG, which saw July searches rise by 35 percent from the prior year. MSFT's MSN Search, meanwhile, dropped three percent from the year prior, placing it in a relatively distant third place. In all, GOOG registered 49.2 percent of the total July searches, while Yahoo had 23.8 percent and MSN had 9.6 percent.

Not content to rest on its laurels, YHOO has also enlisted the help of eBay (EBAY: sentiment, chart, options) in a deal similar to the one that GOOG recently signed. On June 1, YHOO made a deal with EBAY to broker ads for the online auctioneer in the U.S. (GOOG recently penned a deal with EBAY for all non U.S. advertising). The deal for YHOO is expected to bring in about 13 billion additional page views a month for the company, approximating to a 30-percent increase for the firm. With figures like this floating around, analysts were quick to jump on the YHOO bandwagon, hinting that the company may be able to make some headway against GOOG's current dominance. However, while July did turn out to be an impressive month for the firm with a 34-percent rise in searches, GOOG still bettered its predecessor on the month (and that was without GOOG's new EBAY deal).

On a fundamental basis, YHOO continues to perform at the level of its second-place ranking. On July 18, YHOO reported that second-quarter profit fell sharply to $164.3 million, or 11 cents per share, from $754.7 million, or 51 cents, a year ago. Excluding the payments YHOO makes to other web sites to acquire traffic, sales rose 28 percent to $1.12 billion, but still missed the consensus estimate for $1.14 billion. What's more, it didn't further the search firm's case when its profit of 11 cents per share matched the Street's view but missed the WhisperNumber.com "whisper" number of 13 cents per share. This whisper number is a derivation of investor expectations heading into the earnings report, and expectations were apparently set pretty high.

Technically speaking, the earnings miss on July 18 was devastating to the shares of YHOO, as they plunged more than 21 percent on the news. The stock did eventually bottom out, finding long-term support at the 25 level, but YHOO had already tagged a multi-year low and was trading at its lowest level since April 2004. The move also plunged the equity below long-term support at its 40-month moving average while testing the resolve of its 80-month counterpart. In fact, YHOO logged its first monthly close beneath its 80-month trendline since February 2004. The shares have since regained this moving average and are now challenging their 40-month trendline, but resistance at the round-number 30 level may spoil the party.

Moving over to a daily chart, you can more clearly make out the earnings-day plunge from YHOO. You can also see that the stock continues to suffer under resistance at its declining 80-day moving average and was troubled by its 40-day trendline until yesterday. However, with resistance at the 30 level flashing its fangs, I wonder just how long the 40-day will hold before it resumes its resistive roll. The next level of purely technical support for the shares below the 40-day resides in the 26.50 region - which is home to YHOO's 80-month trendline.

With the technical and fundamental analysis out of the way, let's take a look at the cornerstone of our Expectational Analysis ^® methodology: sentiment. Below is a quick rundown of some of the popular equity sentiment indicators.

Sentiment Rundown for YHOO:

• Percent of analysts tracked by Zacks who rate the stock with a "buy": 74%
• Number of analysts tracked by Zacks: 23
• Short interest as a percent of float: 7.24%
• Short-interest ratio: 3.07
• Schaeffer's put/call open interest ratio (SOIR): 0.56
• SOIR percent rank: 33%
• Schaeffer's Equity Scorecard: 3.0

The figures above are certainly not what I would like to see if I were making a bullish case for YHOO. Given the technical picture for the shares, I would prefer to see a good deal more pessimism. However, with 12 of the 23 analysts doling out "buy" ratings, and no "sells" to be found, YHOO is definitely in danger of being downgraded. Furthermore, short interest is rather mediocre, and despite the more-than-seven percent of YHOO's float sold short, it would still take a middle-of-the-road three days for investors to buy these shares back. While I would not rule out short-covering support at this point, I also wouldn't bet on any rally fuel from these figures.

Meanwhile, there have been plenty of bullish media stories on YHOO recently. On June 1, The Wall Street Journal published a story titled "Yahoo Searches for Growth Engine" that was very optimistically aligned on the shares. Furthermore, on August 13, the Journal published yet another bullish article on YHOO titled "Gauging Miller's Tale at Legg Mason." In the article, Bill Miller of Legg Mason, placed his fair value for the stock at $36 per share, about a third higher than YHOO's current perch. As many regular readers of SchaeffersResearch.com know, this type of heavy-handed bullish sentiment from the financial media is viewed as a negative for the shares.

I saved the options sentiment data for last because I believe it presents a much more telling tale for YHOO. First and foremost, the security's Schaeffer's put/call open interest ratio (SOIR) of 0.56 indicates that calls nearly double puts in the front three months of options - hinting at an elevated level of optimism from the group. Furthermore, this ratio ranks in the 33rd percentile of its annual range, indicating that options players have only bee more bullish 33 percent of the time during the past year. Additionally, this ratio has been in decline mode since January. A look at a chart of YHOO compared to its SOIR reveals that the shares tend to trend in the direction of this ratio, telling me that a continued decline in the SOIR (or an extended rise in optimism from options players) could indicate that further downside is in the cards for YHOO.

Meanwhile, a look at the options configurations for the September and October series clearly defines the potential for options-related resistance for the shares. Peak call open interest resides at the 30 level in September and moves to the 32.50 level in October. On the other hand, peak put open interest has taken up residence at the 27.50 level in September, putting in a potential short-term floor for the security. However, the bottom drops out in October, leaving YHOO dependant on its 80-month moving average once again.

I went into this article looking to find an investing difference between YHOO and its search engine competitors GOOG and MSFT. What I have found is that YHOO might make a better bearish play than either of its brethren. Look for a rejection at the 30 level for confirmation, but I would not be surprised to see the shares retest support at their 80-month moving average (or even breach this support level) over the intermediate term.

As always, thank you for reading and good luck in your trading!