Bernie's Bull & Bear Bets

05/05/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer stands out from the crowd by going against the crowd, and his keynote speech in Las Vegas is sure to offer unique and independent insights. Here’s a look at his latest commentary, with both a bullish and bearish technology play.

"Looking at an investment from a contrarian perspective is a key to success. Keep in mind that contrarianism is not about buying low prices and cheap stocks. Instead, contrarianism is about buying low expectations. High prices do not necessarily equal high expectations just as low prices don't equate to low expectations.

"The ideal contrarian purchase is a stock with strong price action, strong fundamentals, and low expectations. However, don't let a contrarian viewpoint be the immediate driver for a trade. Investors sometimes have succumbed to the temptation to immediately react to a news story or a magazine article that they find particularly compelling from a contrarian perspective by taking a stock position.

"Amateur investors tend to bet with consensus thinking, which is a sure way to lose over time. Whether it's an article in a national publication, a hyped new product or a 'tip' you're betting on, Wall Street has a way of already discounting such news before it becomes widely disseminated. By that time, smart investors are looking for opportunities to bet opposite from the conventional wisdom.

"One bullish idea is Nvidia (NVDA NASDAQ), which makes programmable graphics processors. The stock has been a consistent outperformer, outstripping the broader NASDAQ Composite on a relative-strength basis since July 2004. The stock has gained an impressive 178% over the past year, thanks in part to the support of its ten-week moving average.

"In fact, the shares have closed just three weeks below this trendline since early May 2005.Although NVDA is a consistently strong performer, the options pits are flowing with pessimism. Our Schaeffer’s open interest ratio for the stock of 1.63 is higher than 94% of all readings taken during the past 52 weeks.

"Options players are not alone in their bearish stance toward NVDA, as 14 of the 18 analysts covering the firm rate it a ‘hold’ or worse, according to Zacks. Should this bearish bunch issue upgrades, the stock could enjoy a further boost. Finally, more than 7% of the stock's float is currently sold short, which could provide the fuel needed for a short-covering rally. For those familiar with options, we recommend the purchase of January 2007 25 calls.

"One bearish play is Yahoo (YHOO NASDAQ). The company recently reported that first-quarter profit dropped 22% from a year ago. Meanwhile, the stock has lagged behind its peers, with its weekly relative strength measure versus the GSTI Internet Index tumbling lower since October. In addition, the stock has moved into resistance at its declining 20-week moving average, a trendline it hasn’t closed a week above since mid-January. 

"What’s more, the equity is poised to notch its fourth consecutive monthly close below its ten-month and 20-month trendlines, a first since June-September 2002. These trendlines are also in the midst of their first bearish cross since November 2000. Brokerages continue to show high expectations, with 20 ratings of ‘buy’ or better and no ‘sells’ to be found.

"Meanwhile, the stock boasts a Schaeffer’s open interest ratio that is lower than 84% of readings taken during the past year, indicating high optimism among speculators. For those interested who are options traders, our recommendation is to buy the January 2007 40 puts."

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