Why Buy Yelp Inc (YELP) Ahead of Earnings?

Yelp Inc's (YELP) recent performances in the earnings booth have been a boon to the social media stock

Oct 21, 2016 at 11:55 AM
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Yelp Inc (NYSE:YELP) is down 2.5% today at $33.50 amid broad-market headwinds. However, based on the stock's longer-term technical and sentiment backdrops, this recent pullback could be presenting a buying opportunity. Below, we'll examine the bullish contrarian case for YELP.

To be sure, the social media stock has had a rough few weeks, since hitting an annual high of $43.36 on Oct. 5. However, YELP is now approaching its pre-earnings bull gap level from early August -- which corresponds with its late-2015 highs, and could act as a layer of support. Not to mention, the shares are still up over 16% year-to-date, easily besting the broader market.

yelp daily october 21

YELP could turn things around shortly, too. Yesterday, the stock made a doji, which could signal an impending period of consolidation or even a reversal higher. What's more, the stock's 14-day Relative Strength Index (RSI) is at 26.6 -- in oversold territory, suggesting a near-term bounce could be in the cards.

Shifting our focus, bearish options betting has picked up in recent weeks, relatively speaking. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), YELP has racked up a 10-day put/call volume ratio of 0.58 -- outstripping three-quarters of all readings from the past year. Not to mention, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.77 sits 15 percentage points from a 12-month peak. With pessimism on the rise, a show of strength in the underlying could sends bears running, potentially creating tailwinds.

Lastly on the sentiment front, the brokerage crowd remains skeptical of Yelp. Fifteen of 27 analysts rate the shares either a "hold" or a "strong sell." In other words, if brokerage firms begin to follow in the bullish footsteps of Cantor Fitzgerald -- which dubbed YELP one of its top picks -- a round of upgrades could add fuel to the fire.

Looking ahead, Yelp Inc (NYSE:YELP) earnings could provide a major upside catalyst, as well. The next report is set to drop the morning of Wednesday, Nov. 2, and the company has absolutely killed it in recent quarters -- triggering some monster rallies. Specifically, in the session subsequent to YELP's early May and August earnings reports, the shares surged 23.7% and 12.8%, respectively.

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