Joseph Hargett (jhargett@sir-inc.com)
8/31/2006 3:37:27 PM
Ok, so it seems that I have inadvertently settled into a theme for the week by focusing on Internet stocks. In case you missed the previous two, on Monday, I discussed the ongoing battle for Internet and desktop supremacy between Google
(GOOG:
sentiment,
chart,
options)
and Microsoft
(MSFT:
sentiment,
chart,
options)
, while yesterday I delved deeper into Yahoo!'s
(YHOO:
sentiment,
chart,
options)
outlook. After being rather hard on the sector in these previous two commentaries, I thought it was time to find a pick for the bullish readers out there. Below is a listing of Internet-related stocks garnered from using our Scorecard Sector Scan filter from the Schaeffer's Premium Tools section of the Quotes & Tools area of SchaeffersResearch.com. While all of this information is available using various tools in the Quotes & Tools area, I've complied it all for you in a nice and neat little chart.
The list above is sorted by Schaeffer's Equity Scorecard ratings from highest to lowest. I'm not surprised to see several big name stocks like YHOO, Amazon.com
(AMZN:
sentiment,
chart,
options)
, and GOOG lingering near the bottom, as sentiment toward these large-cap names continues to remain high despite their underperformance. I am also not surprised that the cream of the crop appears to be small-cap names like RealNetworks
(RNWK:
sentiment,
chart,
options)
, Intuit
(INTU:
sentiment,
chart,
options)
, and Emdeon
(HLTH:
sentiment,
chart,
options)
, formerly WebMD. This configuration falls right in line with what Bernie Schaeffer has been preaching for some time, that small-caps are set to outperform, while large-caps will continue to suffer.
Scanning the list for a solid bullish pick, two names really start to stand out: INTU and RNWK. Since my esteemed colleague Ryan Detrick covered INTU in his piece The Soft Side of the Market earlier today, let's take a closer look at RNWK. In case you are unfamiliar with the company, Hoover's states that RNWK's software and subscription services provide access to news, sports, and entertainment content (RealOne), downloadable games (RealArcade), and streaming and downloadable music (Rhapsody, RealPlayer Music Store, RadioPass). The company also serves the enterprise market with tools for creating, delivering, and licensing digital content.
From a fundamental perspective, the company has had its ups and downs. During the past four reporting periods, RNWK has topped the Street's expectations twice, missed once, and matched once. During the most recent reporting period, the firm bested analyst expectations by two cents per share, and even managed to beat its "whisper" number from WhisperNumber.com by the same margin. Not to shabby for a small-cap that wasn't expected to do much.
Looking at the security's technical performance, I see that until recently (today in fact) RNWK was pretty much range bound between the nine and 11 levels. The daily chart below illustrates this sideways trend rather well; it also shows that RNWK has broken out of this range in today's trading, with the shares gaining more than three percent to tag a fresh multi-year high.
Pulling back a bit to look at a weekly chart reveals that RNWK is actually in the midst of a long-term uptrend that began in August 2005. This upward momentum eventually pulled the stock's 40-week and 80-week trendlines into a bullish cross - which was clearly a positive sign for the equity. Furthermore, since September 2005, RNWK has enjoyed the support of its 40-week moving average, last bouncing off support at this intermediate-term trendline in July, culminating in today's breach of long-term resistance at the 11 level.
Sentiment Recap for RNWK:
- Percent of analysts tracked by Zacks who rate the stock with a "buy": 45%
- Number of analysts tracked by Zacks: 11
- Short interest as a percent of float: 24.44%
- Short-interest ratio: 6.06
- Schaeffer's put/call open interest ratio (SOIR): 1.44
- SOIR percent rank: 97%
- Schaeffer's Equity Scorecard: 8.0
Scanning the sentiment indicators for RNWK, I find very little to dissuade me from a bullish take on the equity. Analyst activity is decidedly bearish on this outperformer, with six of the 11 covering brokerage firms doling out "hold" or worse ratings. Contrarians know that this configuration creates the potential for upgrades that could help RNWK over the near-term.
Meanwhile, short interest represents a whopping 24 percent of the stock's total float, and would take more than six days to cover at the security's average daily trading volume. When a stock has a high degree of short interest levied against it, there are many investors out there who could be forced into buying back those positions, should the shares move higher. Conversely, a large short position on a security could also pull in money from the sidelines on a pullback, as these bearish investors move in to take profits in the form of buying the shares back. The former scenario would greatly help RNWK at this point, and if the shares continue to rally, we could see additional buying pressure as these pessimists are squeezed out of their bearish positions.
Finally, the speculative options crowd has cornered the market on pessimism for RNWK. The stock's SOIR of 1.44 indicates that puts easily outnumber calls in the front three months of options. Furthermore, this ratio ranks above all but three percent of those taken during the past year. This bearish extreme from options players bodes well for RNWK from our contrarian point of view. Yet another positive note for the shares is that they tend to trend in the direction of their SOIR. The chart below shows a rather sharp spike in put activity for RNWK since August options expired. While I really don't expect the stock to mirror this quick rise, we could see additional upside potential for RNWK in the coming weeks.
So, there you go, a bullish pick in the Internet sector as promised. Use it as a stand-alone position for your portfolio or as a hedge against a bearish position on GOOG, MSFT, or YHOO. As always, thank you for reading and good luck in your trading!
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