Contrarian Tailwinds Boost Disney

04/23/2014 9:00 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Beth Gaston of Schaeffer Investment Researchhighlights several options strategies for contrarian investors betting that this out-of-favor entertainment firm will benefit from analyst upgrades and short covering activity.

Entertainment behemoth The Walt Disney Company (DIS) has been dancing its way up the charts for many months, maintaining a long-term uptrend since late 2011.

The stock's continued upward momentum ushered it to a new all-time peak of $83.65 last month, but Disney shares could be perched to break out to uncharted territory over the near term.

Late last week, DIS shares pulled back to the area of their 80-day moving average, which coincided with the stock's early January peak. The shares have since successfully turned higher from this trendline.

Data indicates that DIS has returned an average of 3.7% in the three weeks following five similar pullbacks to this trendline. As such—with the stock perched at $79.61—it may be an opportune time to give DIS shares a fresh look.

The options crowd is relatively skeptical toward DIS, which is an encouraging sign from our contrarian perspective. Specifically, the 50-day put/call volume ratio has crept higher since the beginning of the year. What's more, it ranks higher than 84% of all comparable readings taken during the last 12 months.

Meanwhile, on other corners of Main Street, Disney boasts a short-interest ratio of 5.3. In other words, it would take more than a week (at the stock's average daily volume) to exit the 36-million-plus DIS shares sold short.

If the stock continues to move higher off of its retest of trendline support, a short-covering rally could be in the cards.

Also, there is some room on the bullish bandwagon as far as analysts are concerned. Of the 22 brokerage firms following the shares, nine have rated the stock a tepid "hold," leaving potential room for additional upgrades.

DIS could benefit from ensuing contrarian tailwinds, should any firm follow in the footsteps of Evercore, which upgraded its price target on DIS late last night.

DIS is expected to report fiscal second-quarter earnings after the close on Tuesday, May 6. Analysts are expecting per-share results of 95 cents, a 20% improvement over year-ago figures.

The company has matched or exceeded Wall Street's consensus view in each of the past eight quarters, but its post-earnings reaction has been far from volatile. Specifically, DIS has gained an average of 0.4% and 1% in the respective day and week following its earnings report.

Options players looking to trade a long call position in The Walt Disney Company shares could consider the in-the-money, longer-term July 72.50 call, currently asked at $8.45.

More conservative traders who want to lower their breakeven price (and their overall risk) could consider legging into a bull call spread by simultaneously selling to open the July 85 call, currently trading at a bid price of $1.37.

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