2 Cheap Stocks Flashing 'Buy' Signals

Shares of Century Aluminum Co and Oclaro, Inc. could be heading higher, should short sellers hit the exits

Mar 17, 2017 at 11:14 AM
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Every week, Schaeffer's Senior Quantitative Analyst Rocky White runs a study to identify stocks that have pulled back to significant trendlines. Two names that jumped out at us this week are metals stock Century Aluminum Co (NASDAQ:CENX) and optical solutions specialist Oclaro, Inc. (NASDAQ:OCLR). Both of these equities recently pulled back to moving averages that have historically boded well for the shares, and both could also stand to benefit from a short-squeeze situation. What's more, these two attractive stocks are relatively cheap, with the shares trading well below $15.

Underloved Century Aluminum Could Be Ready to Break Out

After bottoming out around $5.50 last September, CENX jolted higher. The shares tagged a two-year high above $16.50 last month, and have since pulled back to the rising 80-day moving average. The stock has seen four pullbacks to this same trendline in the past three years, and while the 21-day post-signal return has been positive only 50% of the time, that may be a gamble worth taking, considering CENX averaged a 22.2% gain across these four occurrences.

What's more, there appears to be plenty of fuel left in the stock's tank, even after a 45% year-to-date gain has the stock trading at $12.57. For one, short interest accounts for 32% of CENX's total float, or more than a week's worth of pent-up buying demand, at the equity's average pace of trading. Plus, not one of the four analysts tracking the stock rate it better than "hold." A round of short-covering and/or upgrades from the brokerage bunch could send the stock on another leg higher.

Pessimism appears rampant in the options pits, as well. Over the past 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have purchased 4.45 CENX puts for every call -- a put/call volume ratio that sits just 6 percentage points from an annual high. An unwinding of these bearish bets could be another boon for Century Aluminum Co.

Options Traders Near Bearish Extreme on Outperforming Oclaro

Recent M&A chatter has had OCLR stock climbing the charts this week, widening its year-over-year lead to 109%, with the shares last seen at $9.37. What's more, OCLR recently pulled back to the 160-day moving average, which has historically been a bullish signal for the stock. Specifically, two prior pullbacks to this trendline over the last three years have both given positive returns after 21 days, with an average gain of 26.4%.

This probably sits fine with the brokerage bunch, where the majority of analysts calling OCLR a "strong buy." But short sellers could be sweating. Short interest has more than quadrupled since October, rising by nearly 20% in the two most recent reporting periods alone. These bearish bets now sit just shy of last May's record high, representing 16.1% of the stock's total float. Should some of these recent shorts hits the bricks, the security could get a boost on the charts.

Oclaro, Inc. could certainly stand to benefit from a shift in sentiment among options traders, as well. The stock's 50-day put/call volume ratio on the ISE, CBOE, and PHLX stands at 0.24 -- call-skewed on an absolute basis, but ranking in the 90th percentile of its annual range, meaning puts have been bought to open relative to calls at a faster-than-usual clip. A preference for puts is even more prevalent among near-term speculators, per OCLR's Schaeffer's put/call open interest ratio (SOIR) of 1.06, which is docked an annual high.

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