Ups and Downs on Vacation

04/07/2006 12:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

"With spring begun, I've searched for bullish and bearish ideas among companies that specialize in entertainment, distraction, and that glorious idea of vacation," notes Jocelynn Drake. Here, she looks at a potential winner among casinos and a loser among cruise lines.

"When it comes to locating a bullish bet, I didn't have to dig too deep to find Wynn Resorts (WYNN NASDAQ), which opened Wynn Las Vegas in 2005 a $2.4 billion resort and casino, on the site of the former Desert Inn on the Las Vegas Strip. The resort boasts a 2,700-room hotel, a casino with 2,000 slots and 135 table games, 18 restaurants, an 18-hole golf course, an art gallery, two wedding chapels, and a Ferrari and Maserati dealership. Furthermore, WYNN is developing an adjacent casino, Encore (opening in 2008), and a casino in Macau.

"Technically speaking, the shares have staged a solid rally since bouncing off support in the 42 area. The equity has tacked on more than 80% as it has climbed on the support of its ascending ten-week moving average. What's more, this uptrend has carried the equity through former resistance at the 76 level.

"Meanwhile, traders are determined to call a top to the stock's ascent. Options players have piled into the equity's puts, pushing its Schaeffer's put/call open interest ratio (SOIR) up to 1.54. This reading is higher than 94% of all those taken during the past 52 weeks. In other words, speculators have been more bearishly aligned toward the security only 6% of the time.

"Short interest has also swelled to hefty proportions. While the number of WYNN shares sold short dropped by 8.7% in March, the 8.6 million shorted shares still account for 17.9% of the security's float. What's more, it would take roughly five days to buy back these bearish bets at the stock's average daily trading volume. A continued unwinding of these positions could fuel a significant rally in WYNN. Overall, this combination of technical strength and overwhelming pessimistic sentiment has earned WYNN a Schaeffer's Equity Scorecard ranking of 8.0 out of 10.

"Near the bottom of my list of stocks I find Carnival (CCL NYSE) with an Equity Scorecard ranking of just 0.5. Let's take a closer look at this potential bearish opportunity. CCL is the world's number-one cruise operator, with 12 cruise lines and almost 80 ships carrying about 6.8 million passengers. The firm operates in North America primarily through its Princess Cruise Line, Holland America, and Seabourn luxury cruise brands, as well as its flagship Carnival Cruise Lines unit. Brands such as AIDA, P&O Cruises, and Costa Cruises offer services to passengers in Europe while the Cunard Line operates the ocean liners Queen Mary 2 and the QE 2.

"From a technical perspective, it hasn't been pretty for CCL. The stock has underperformed the S&P 500 on a weekly basis since January 2005. Moving in for a closer look, the equity has slid lower from its January 13, 2006 peak of 56.14, shedding more than 16% under pressure from its 10-day and 20-day moving averages. What's more, the security has once again breached support at its 20-month trendline. The only concern I have with the stock from a technical point of view is the 46 level. This region buoyed the shares in April and October.

"Turning to the stock's sentiment backdrop, investors are extremely optimistic about the firm. Options players have exhibited a definite preference for bullish calls over puts. The equity's SOIR rests at 0.63 and is just one percent shy of hitting a new annual low. What's more, short sellers have grown complacent. In March, short interest dropped 16% to 10.9 million shares, or just 2% of the stock's float. With a short-interest ratio of 3.3 days to cover, the equity has little in the way of potential short-covering support.

"Even Wall Street has become enamored of the company. According to Zacks, 11 of the 14 analysts following CCL rate it a ‘buy’ or better. This configuration leaves ample room for potential downgrades. While CCL looks like a solid bearish bet, traders may want to wait to see if the stock will break through support at 46 before jumping in."

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