'Undervalued' Outlook Sends Conn's Inc (CONN) Soaring

Conn's Inc (NASDAQ:CONN) was upgraded to "buy" from "hold" at Stifel

Sep 21, 2016 at 11:26 AM
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Conn's Inc (NASDAQ:CONN) is one of the top percentage gainers on the Nasdaq this morning, up 17.9% at $11.98. Boosting CONN stock is an upgrade to "buy" from "hold" at Stifel. Specifically, the brokerage firm waxed optimistic over Conn's plans to increase its portfolio yield, and said it believes CONN stock is "undervalued and could trade at least a 10x P/E multiple." While this bull gap could have short sellers on edge, it appears some may have been bracing for a breakout via long call options.

At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), for instance, options traders have bought to open 4,362 calls on CONN over the past 10 sessions, compared to just 330 puts. What's more, the resultant call/put volume ratio of 13.22 ranks in the 92nd annual percentile, meaning calls have been bought to open over puts at a faster-than-usual clip.

Drilling down, CONN's October 9 call has seen the biggest rise in open interest over this time frame, with roughly 5,000 positions added. According to the major options exchanges, a healthy portion of this activity was of the buy-to-open kind, and occurred on Sept. 8 -- a day when CONN surged 11.8% on a strong earnings to close at $8.05.

While it's certainly possible that this action was a result of "vanilla" option bulls eyeing more gains, it's also plausible that short sellers were hedging their bearish bets against any additional upside risk. Short interest on CONN jumped 4% in the most recent reporting period, and now accounts for a whopping 34% of the stock's available float.

Whatever the reason, now appears to be a prime time to purchase premium on the stock's near-term options. CONN's Schaeffer's Volatility Index (SVI) of 65% ranks lower than 91% of similar readings taken in the past 12 months. Simply stated, the equity's short-term options are pricing in low volatility expectations at the moment.

Looking at the charts, CONN has been a long-term underperformer. Even with today's upside gap, the stock remains 54% lower on a year-over-year basis. Plus, Conn's Inc (NASDAQ:CONN) appears to be running out of steam near its 40-week moving average -- a trendline the equity has not conquered on a weekly closing basis since August 2015.

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