3 Stocks Getting Too Much Love

Analysts and traders are overly bullish on these three outperforming securities

Nov 20, 2015 at 10:29 AM
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Earlier this week, we examined three stocks that analysts and traders have been overlooking, in spite of their strong performances. However, the opposite phenomenon can just as easily occur. Here are three stocks that remain beloved by analysts, despite their fundamental and technical follies.

There is no question that
Valeant Pharmaceuticals Intl Inc (NYSE:VRX) has received more than its fair share of attention over the past month or so, sparked by serious fraud accusations from Citron Research. What's more, the company has been subpoenaed by U.S. prosecutors regarding its pricing models, and today said it will host an investor day on Dec. 16, to discuss business operations and financial guidance.

The drugmaker has lost 41% of its value so far this year, despite yesterday's 16% rally on Ackman-driven hopes of an Allergan PLC (NYSE:AGN) bid. In fact, VRX just touched a two-year low of $69.33 on Wednesday, and was last seen sitting at $84.16.

In spite of these terrible technicals, VRX has maintained favor with analysts and traders alike. Ten out of 14 brokerages following the stock maintain a "buy" or better rating, and the average 12-month price target sits at a whopping $219.97 -- more than double VRX's current price. Meanwhile, less than 4% of Valeant's available float is sold short. At the stock's average pace of trading, it would take not even one session to buy back these bearish bets.

On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX), VRX boasts a 10-day call/put volume ratio of 1.45 -- higher than 75% of readings taken in the last year. But all this comes on a stock that has underperformed the S&P 500 Index (SPX) by more than 60 percentage points over the last two months. Should VRX extend its quest for new lows -- or unveil a disappointing forecast next month -- an unwinding of optimism could exacerbate selling pressure.

Sunedison Inc (NYSE:SUNE) 
has underperformed the SPX by 63 percentage points over the last three months, and today is down 9.3% at $2.60. In fact, the equity just touched a three-year low of $2.58, after J.P. Morgan Securities downgraded the stock to "neutral" from "overweight," and took a hatchet to its price target, dropping it to $5.50 from $19.

Still, despite the stock's 86% year-to-date loss, and the company's liquidity concerns, SUNE sports 10 "buy" or better ratings, compared to four "holds" and not a single "sell." Options traders appear to be similarly bullish, with Sunedison Inc's 50-day call/put volume ratio of 2.58 on the ISE, CBOE, and PHLX in the 82nd annual percentile. What's more, near-term traders are paying up to bet on SUNE; the stock's Schaeffer's Volatility Index (SVI) of 241% is near an annual high, reflecting elevated volatility expectations. If more analysts follow J.P. Morgan Securities or BofA-Merrill Lynch -- or if recent call buyers hit the exits -- the shares could be in for a major slump.

Another serious underperformer that seems to have options traders in a bullish frenzy is Spirit Airlines Incorporated (NASDAQ:SAVE), the low-cost airline that has lagged behind the SPX by 31 percentage points over the past three months. Reports of lackluster third-quarter sales and uninspiring guidance did nothing to help the shares last month -- and it can't help that Spirit Airlines reportedly has an abysmal record for on-time arrivals. In fact, Spirit Airlines Incorporated is just off a two-year low of $32.73, touched earlier this week, and was last seen in the $37.09 vicinity -- down more thn 50% in 2015. 

All the same, seven analysts currently give the security a "strong buy" rating, versus just three "holds" and no "sell" ratings to be found. A mere 4.9% of the stock's total available float is sold short -- and it could all be bought back in less than one day, at SAVE's typical volumes. But most astounding of all is Spirit's 10-day call/put volume ratio at the ISE, CBOE, and PHLX, which has skyrocketed over the last month -- and now rests at 27.71 -- higher than 99% of all other readings from the past year. That means more than 27 calls have been bought for every put over the last two weeks of trading. Future downgrades on the stock, or an unwinding of optimism in the options arena, could mean more trouble for SAVE.


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