Contrary Plays

01/30/2004 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

One of the hallmarks of Schaeffer's Investment Research is its application of contrary analysis to the investing process, using such diverse criteria as an analysis of media and investor sentiment to put-to-call ratios and short interest. Here, the research firm looks at the oil sector.

"The sentiment backdrop for the integrated oils remains pessimistic," says Ron Taylor, analyst with Schaeffer's Investment Research . " The current sector put/call open interest ratio stands at 0.83, which ranks in the 100th percentile of the past year's worth of readings. In other words, despite the fact that the oil index is 37% off its lows from March, options speculators are significantly more pessimistic now relative to March. From a contrarian perspective, we view this pessimism in the face of a solid uptrend to be exceptionally bullish.

"Another development is a recent bearish article in BusinessWeek. This type of media pessimism in combination with strong price action, improving fundamentals, and negative sentiment readings can be a particularly powerful opportunity for investors. Two companies in particular have been in a strong uptrend amid significant pessimism. BP Amoco (BP NYSE) for example, has a put/call open interest ratio of 1.06, which is higher than 98% of all readings over the past year. The company also has a short-interest ratio close to four days to cover. ChevronTexaco (CVX NYSE) has an open interest rate of 0.92, higher than 99% of readings over the past year, and a short-interest ratio of over four, which is also up 44% since last month. Some oil shares may continue to defy the critics as long as there is a broadly negative sentiment view of these companies.

"In addition, the overall sentiment backdrop for oil drilling stocks still appears cautious. For example, data from Zacks shows that just 37% of the analysts' recommendations on Noble (NE NYSE) are ‘buy ratings. Transocean (RIG NYSE) shows a strikingly similar profile with just 38% of the ratings as ‘buys.’ Short interest data echoes this skepticism with both stocks showing double-digit percentage increases last month, and carrying short interest that is at least three-and-a-half times the stock's average daily volume."

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