Red-Hot Rockwell Automation Stock Has Room to Run

Rockwell Automation stock could find fresh tailwinds as sentiment begins to improve

May 9, 2017 at 11:17 AM
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Shares of industrial automation firm Rockwell Automation (NYSE:ROK) have put in a strong performance on the charts over the past 12 months -- boasting a 40% year-over-year gain and a 16% year-to-date lead. What's more, the shares hit a record high on April 26, after the company reported a fiscal second-quarter earnings beat and upwardly revised guidance. More recently, ROK has pulled back to reliable support at its 20- and 40-day moving averages, as well as a trendline connecting a series of higher lows since the U.S. presidential election last November.

 

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Even with ROK's technical and fundamental backdrops intact, though, sentiment has room to improve -- which could add fuel to the stock's fire. At the major options exchanges, ROK's top-heavy 10-day put/call volume ratio of 4.89 ranks in the 87th percentile of its annual range, meaning puts have been bought to open over calls at a faster-than-usual clip. Plus, the security's Schaeffer's put/call open interest ratio (SOIR) of 1.33 sits above 78% of all comparable readings taken in the past year. In other words, short-term options traders are more put-skewed than usual toward the stock. An unwinding of this skepticism could translate into a fresh burst of buying power for ROK.

The stock could also get a boost once analysts start to recognize its impressive technical feats. Of the 14 brokerages covering ROK, 11 maintain a "hold" or "strong sell" recommendation. This leaves ample opportunity for upgrades to help lift shares higher.

The stock's options are currently pricing in low volatility expectations, too, a potential boon to premium buyers. Specifically, ROK's Schaeffer's Volatility Index (SVI) of 19% is perched below 89% of all similar readings taken over the last 12 months. Meanwhile, our recommended call option sports a leverage ratio of 8, indicating it will achieve its target profit on an 11.9% rise in Rockwell Automation (NYSE:ROK).

Subscribers to Schaeffer's Weekend Trader services received this commentary on May 7. 

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