Internet Bets

04/30/2004 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Over a year ago, at the market’s bottom, when sentiment on technology was at its most negative, Bernie Schaeffer turned bullish on such Internet favorites aseBay and Yahoo. Although the stocks have shown significant gains, he remains bullish.

"eBay (EBAY NASDAQ) reported stellar earnings recently, as revenue soared 59% over year-ago levels and net income skyrocketed 92%. The firm raked in a profit of 31 cents per share, besting the consensus estimate of 26 cents per share. This was clearly a surprise, as pessimism was riding high ahead of the firm's earnings announcement. The equity's Schaeffer's put/call open interest ratio of 1.43 was higher than 90% of all those taken over the past year, while the number of shares sold short shot 12% higher in March to 29.7 million. At the stock's average daily trading volume, it would take more than four days to cover these bearish bets. This accumulation of short positions could easily fuel additional gains in the security. Technically speaking, the stock has surged through overhead resistance at the 76 level and continues to rise along the steadfast support of its ten-week and 20-week moving averages. For options traders, we suggest buying the October 75 calls.

"Yahoo (YHOO NASDAQ) has enjoyed an excellent run for the past year-and-a-half along the tandem support of its ten-week and 20-week moving averages. What's more, since gapping higher after reporting better-than-expected earnings on April 7, the shares have found building support at the 54 level and their ten-day moving average. The security has closed only one day below this trendline since mid-March. Nevertheless, investors remain skeptical of the security. In fact, heading into the recent earnings report, YHOO received two analyst downgrades. The number of YHOO shares sold short soared 72% higher during the most recent reporting period, marking the largest increase (about 20 million shares) on the entire NASDAQ for the month. An unwinding of this pessimism should add support to YHOO's current rally. For sophisticated options traders, we suggest selling the June 50 put, a strategy, which will profit from continued gains in the underlying stock."

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