The Long and Short of Retail

05/16/2003 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Ironically, Bernie Schaeffer, editor of The Option Advisor has opposing opinions on two of the largest retailers. He is bullish on e-Bay, the huge online 'flea market' retailer. At the same time he is bearish on Wal-Mart, the world's largest mainline retailer. Here's his overview of these companies, which accentuate his advice to avoid the big blue-chip names and concentrate your long exposure in tech, especially in the small- and mid-caps.

"eBay (EBAY NASDAQ) makes our bullish list. Pessimism remains heavy toward the stock, despite its strong rally higher. Nearly 3,000 contracts have changed hands this morning at the equity's May 90 put. This is the site of peak front-month put open interest and could act as a layer of support should the shares pull back. Its Schaeffer's put/call open interest ratio checks in at 1.22, as puts outnumber calls in the front three months of options. This reading is higher than 98 percent of those taken over the past 52 weeks. Technically speaking, the shares have been trending higher along support at their ten-day and 20-day moving averages since October. The security is also moving higher off support from its ten-week moving average. EBay may still have some more room to run as this extreme pessimism unwinds.

"At the same time, retailer Wal-Mart Stores (WMT  NYSE) makes our bearish list. In corporate news, Wal-Mart reported earnings that met the Street estimate while its revenue came in just shy of the consensus forecast. The firm reported April same-store sales growth of 4.6%, well below the company's original forecast. Despite the poor April sales numbers, sentiment remains firmly entrenched in the bullish camp. According to Zacks, 17 of the 20 analysts following the firm rate it a buy or better, leaving ample room for downgrades to pressure the shares lower. In addition, the equity's short-interest figure declined 25% from the prior month to put WMT's short-interest ratio at its lowest level in over two years at 3.7 days to cover. Finally, options activity over the past month has been skewed to the call side. Traders should target a move down to 49.70 with a stop-loss set for a close above 57.98."

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