The Outperforming Defense Stock that Could Cool

The defense sector has been red-hot since Trump was elected

Nov 8, 2017 at 3:02 PM
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It's been a year since Donald Trump was elected president, and few sectors have benefited more than defense stocks. One name that certainly hasn't been left behind is thermal imaging expert FLIR Systems, Inc. (NASDAQ:FLIR). The stock sports a year-over-year lead of 45%, and hit a record high of $48.06 in late October following a third-quarter earnings beat. The shares have been consolidating just below this level in the subsequent weeks, last seen trading at $46.83, but a number of indicators suggest the coming months could be rough.

First of all, FLIR Systems just showed up on our list of the worst stocks to buy for the November-to-April period, as its averaged a loss of 5.3% for this six-month period since 2010. Not only that, but the security may have run too far too fast, according to its 14-day Relative Strength Index (RSI) of 78. This suggests the equity has been overbought, and is technically due for a pullback.

Despite these warnings signs, call buying has remained hot -- albeit amid low absolute volumes. FLIR has a 10-day call/put volume ratio of 6.93 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX, meaning almost seven calls have been bought to open for every put. 

On the other hand, some traders may see the writing on the wall. During the last two reporting periods, short interest exploded by 72.5%. But these bearish bets only account for less than 2% of FLIR's available float. There remains plenty of room for more bears to jump on this bandwagon, and a continued increase in short interest would put pressure on the shares.

A sharp downturn from the security could make bullish analysts rethink their outlooks. As it stands now, the majority of brokerage firms have "buy" or "strong buy" recommendations, and the equity is still looking up at its average 12-month price target of $49.11, even after the recent surge. Downgrades and/or price-target cuts are possible amid any weakness.

For what it's worth, it's a good time to target short-term FLIR Systems options. That's according to its Schaeffer's Volatility Index (SVI) of 20%, which ranks in the low 16th annual percentile. In other words, low volatility expectations are being priced into near-term options.

FLIR stock

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