Bernie and Chris: Best Bets

02/28/2003 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Traders and investors alike eagerly anticipate Bernie Schaeffer's appearances at The Money Shows, yet at the start of last week's show, Bernie was snowed-in in Cincinnati, and suffering from the flu. To avoid disappointing his fans, he rented a private plane to make it to Orlando in time!  Here are Bernie's current favorite "long" and "short" ideas, along with commentary from Chris Johnson , Schaeffer's Investment Research's quantitative analyst.

"Bull markets climb a wall of worry," says Chris Johnson. "What do bear markets do? They slide down a slope of hope. In recent years, we've seen numerous articles about how much worry there is out there. We base our actions more on the actual actions taken by investors, by quantifying investor sentiment and comparing that to market technicals and fundamentals. Using a contrarian manner tends to pay off in the long run, and is much better than following the herd. In general, we see a bearish tone on the Street regarding technology. But to isolate trading bottoms, we look for spikes in that sense of fear. Currently in this market, we're seeing investors continue to fear that the bull market will pull out of the station and leave them behind. As a result of that, on market dips, we continue to see investors throwing good money into a bad market. In our view, market fundamentals are lackluster, and that's just about the best thing we can say about them. The expected boom in capital expenditures continues to be pushed forward. Forecasters were looking for this boom last year, and now they are looking to the third or fourth quarter of this year. We are not seeing year-over-year earnings growth. We're seeing companies protect their cash, which is giving up on their long-term development plans. As a result of these fly-in-the-ointment fundamentals, combined with the fact that we are trading below some very long-term moving averages and trendlines, we look for continued weakness.

"I'll begin with bad news stocks first. Century Tel (CTL NYSE) is a regional telecom company. When we look at the analysts that are covering the stock, we have 16 that have a buy rating or better, with only three analysts rating it a hold. When I look at the actual options activity in this stock, I see a ratio that's around 0.7, which is also declining. The stock is also trading below its ten- and 20-week moving averages and it has resistance at other key trendlines. While investors should be concerned, we're seeing a lot of optimism. I expect this stock to show continued weakness. I think you'll be able to buy this stock at lower prices in the next three to six months. The same goes for Microsoft (MSFT NASDAQ). Again, if we look at the analysts covering this stock, there are 23 buys or holds, with a high number of strong buys. Only five analysts rate the stock a hold, and none rate it a sell. And the put-call ratio has been in a steep decline over the past few months. We've seen a lot of optimism for this company. Fundamentally, they continue to beat earnings and do a lot of work on their margins and they continue to build their business. But given poor technicals - the stock is below its ten- and 20-day moving averages - and excessive optimism, I think you'll get a better chance to buy the stock at lower prices in the next three to six months. Then, hopefully, if we begin our expected rally after mid-year, Microsoft could be one of those stocks that flourish.

"I have three long positions. Adtran (ADTN NASDAQ) is still expanding their product line. They make digital products used by telephone companies and high-end users. This is one of the companies working on bandwidth needs. They are continuing to expand their businesses, growing fundamentally, and beating earnings expectations by 22% in the last quarter. We are only seeing ten analysts covering this stock. Before they recently beat expectations, there were nine holds and one sell. Since then, just one of them has moved to a buy. When we look at the technicals, we see a stock that continues to get support from key levels, and continues to be above long-term moving averages. So we are seeing technical strength in this stock. At the same time, when we look at investor sentiment, by watching the put-call ratio, we are seeing investors get increasingly pessimistic, despite the company's improving fundamentals.

Here, Bernie Schaeffer offers his current favorite long and short positions:

"Technically, E-Bay (EBAY NASDAQ) has outperformed the NASDAQ by over 300% since January 2001. The stock's relative strength vs. the NASDAQ hit an all-time high in January 2003. Fundamentally, fourth quarter 2002 earnings more than tripled and handily beat expectations. The stock has been a major winner from the explosive growth in E-commerce. Meanwhile, from a sentiment standpoint, short interest of 20 million shares is three times the stock's daily volume. The stock shows more than 85 open put positions for every 100 open calls. Our price target for the stock is 100 in three to six months.

"Technically, Rambus (RMBS NASDAQ) has soared above resistance at 12 and above all its major moving averages. It was the single best tech stock performer in January 2003. Fundamentally, the company just won a major court victory in January that could provide a huge future revenue stream. From a sentiment standpoint, its put/call ratio is higher than 97% of the readings over the past year. Per Zacks, just two analysts cover RMBS and one rates it a 'strong sell'. Our upside target for RMBS is 20 within three to six months.

"Technically, J.P Morgan (JPM NYSE) has rallied off its 10/02 lows and subsequently failed at its declining ten-month moving average. It is the weakest performer of all major banks over the past three years. Fundamentally, fourth quarter 2002 earnings were shy of expectations. In addition, the bank's dividend is in jeopardy. From a sentiment standpoint, the issue's put/call ratio is lower than 90% of the readings over the past year. And per Zacks, just one of 18 analysts rate JPM a 'sell', which suggests significant optimism. Our price target for JPM is 14-15 by year-end.

"Technically, United Technologies (UTX NYSE) has shown six consecutive monthly closes below its declining ten-month moving average. Meanwhile, resistance has formed at the 65 level for past six months. Fundamentally, the company has shown no top line growth over the past five quarters. Meanwhile, its businesses are very sensitive to a weakening economy. From a sentiment standpoint, the stock's put/call ratio is lower than 85% of the readings over the past year. In addition, short interest is down by over 40% since its 10/02 peak. Our price target for UTX is 45-48 by year-end.

"Technically, Pfizer (PFE NYSE) is in a serious bear market, with five straight monthly closes below its 80-month moving average. A declining ten-month moving average has contained all rallies since the start of 2002. Fundamentally, the company has a $180 billion market cap and a 20 P/E ratio with flat revenues, which makes the stock vulnerable. From a sentiment standpoint, the stock is 'overloved'. It has been a favorite pick in the financial media in the extreme. Per Zacks, 24 of 27 analysts rate PFE a 'buy' leaving little room for ratings to improve. We expect PFE to decline to 20 by year-end."

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