Analyst: 3 Reasons to Like This Apple Supplier

LITE could move next week after Apple's March 25 event

by Patrick Martin

Published on Mar 22, 2019 at 10:20 AM

Lumentum Holdings Inc (NASDAQ:LITE) stock is up 2.6% to trade at $53.43, after J.P. Morgan Securities raised its rating on the Apple supplier to "overweight" from "neutral," while boosting its price target to $65 from $50. The analyst in coverage gave three reasons for the upbeat attention: a "solid outlook for the telecom business" thanks to strong 5G investments; its recent purchase of Oclaro; and "limited downside risk relative to iPhone volume expectations." The brokerage firm also hiked its earnings estimates for Lumentum for 2019, 2020, and 2021.

Today's positive price action extends Lumentum stock's recent channel of higher highs, in place since the equity's bear gap to new lows in mid-November -- a gap that's now close to being filled. LITE now boasts a 27% lead year-to-date, but overhead looms the 320-day moving average. What's more, the equity could move next week, with Apple's special event taking place on Monday, March 25.

The shares are ripe for a short squeeze. Short interest increased by 49% in the two most recent reporting periods, to 4.4 million shares, the most since mid-October. This accounts for nearly 10% of LITE's total available float, and more than four days of pent-up buying power, at its average pace of trading. 

Options traders have been more bearish than usual, too. LITE's Schaeffer's put/call open interest ratio (SOIR) sits at 0.82 and ranks in the 100th percentile of its annual range. While this ratio indicates near-term call open interest is still more prevalent than put open interest, the high ratio indicates near-term traders haven't been more put-biased in the past year. 

In terms of option premiums, the security's short-term contracts look attractively priced at the moment. Specifically, LITE's Schaeffer's Volatility Index (SVI) of 44% stands in the 15th percentile of its annual range. In other words, near-term options are pricing in relatively low volatility expectations.

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