A Play on JAKKS
04/21/2006 12:00 am EST
Beth Gaston Moon, an analyst with Schaeffer's Investment Research , assesses a stock's fundamentals and technicals within the framework of contrary sentiment analysis. Here she looks at a play on JAKKS, a toy manufacturer that meets her bullish criteria.
"It's earnings season, bond yields are at historical heights, oil prices continue to rise (just in time for summer travel season!), and the Fed's long-term strategy is anyone's guess. It's a wonder that market averages have been able to hover close to historical heights, with only the mildest of setbacks in recent days.
"Meanwhile, there are some creeping signs of pessimism in the market, which could be a bullish short-term indicator. Last week, the short-term trend in the odd-lot short interest indicator began to rise toward levels not seen since early March, which was immediately prior to the market's rally to annual highs.
"This indicator warrants attention, as negative sentiment tends to unwind quickly following any positive momentum in the market. Combine this factor with structural support on the major indices (in the form of out-of-the-money put open interest) and bullishly configured mutual-fund activity, and the market may find little resistance to another upside drive.
"I am also recommending toy manufacturer JAKKS Pacific (JAKK NASDAQ). JAKKS Pacific shares have maintained a tight and steady uptrend for the past several weeks, benefiting from the support of their 10-day and 20-day moving averages. Since bottoming out in mid-October, the stock has rallied nearly 90%. Earlier this month, the company broke out to post a new all-time high. Nevertheless, several sentiment factors suggest a backdrop of pessimism. The stock scores a 9 on our scale of 1 (lowest) to 10 (highest).
"Nearly one-fourth of the equity's float has been sold short, amounting to a short-interest ratio of 15 days to cover. In other words, at the stock's average daily volume, it would take three weeks for all of the existing shorted positions to be eradicated, heightening the odds of a short-covering rally. Additionally, Wall Street has not yet warmed to the equity, awarding four ‘hold’ ratings, one ‘strong sell’ and only one ‘buy.’ Additional positive coverage or an upgrade or two could therefore be in the offing, as the stock explores new-high territory."