Bernie's Bets

05/23/2003 12:00 am EST


Chris Johnson

Editor, The Winning Edge

Bernie Schaeffer, Joe Sunderman, and Chris Johnson make up the main team at Schaeffer's Investment Research. Bernie needs no introduction, he is among the nation's leading options experts and editor of The Option Advisor. Joe Sunderman is the director of trading at Schaeffer's and Chris Johnson is the director of quantitative analysis.

Joe Sunderman explains, "Our methodology is what we call expectational analysis. This takes two major market theories: fundamental analysis, such as a look at earnings trends, revenues, price-to-earnings ratios, etc. We also look at technical analysis, looking at moving averages, price patterns, and price action. The third component is sentiment analysis. We look at how individual investors position themselves regarding specific investments. Are investors overly optimistic or overly pessimistic? Other methodology can be summed up in one sentence - we take a contrarian approach to investing as we focus on stocks and sectors with technical and fundamental trends that run counter to investor expectations."

"Coming into 2003, Bernie and the rest of the team at Schaeffer's Research were very optimistic on NASDAQ. In the Business Week 2003 forecast issue, we projected an end of the year move to 2200, which would still be 50% above current levels. And we still maintain that posture. We believe the small- to mid-cap stocks will be the ones to drive the market higher. We refer to these stocks as the single-digits-midgets. Some of these stocks have already turned around and have already started to lead the way higher. One of the areas we really like within technology is the Internet. A lot of publications and advisors have been calling this another bubble, saying that e-Bay and Amazon and Yahoo! are all over-valued again. However, from our contrarian standpoint, when a stock is in a very strong uptrend, and when investors are very pessimistic, there is still further upside potential."

"P.F. Chang's (PFCB NASDAQ) is one of my current favorites," says Bernie Schaeffer. "The upscale Chinese eatery recently posted strong first-quarter earnings and raised its guidance for fiscal 2003. This prompted a flurry of price target and earnings upgrades from the analyst community. Meanwhile, PFCB has just completed an orderly pullback from its all-time high to support at its rising 20-day moving average. The shares have also sharply out-performed the NASDAQ Composite for the past three years. Despite these strengths, we're noticing some surprisingly low expectations for the stock. Its SOIR checks in at a whopping 8.10, representing more than eight puts for every call in the front three months of options. This reading is higher than 99 percent of those from the past year - a sign of extreme pessimism that could unwind in the form of higher stock prices. Most of these puts lie at the May and July 40 strikes, which provides a base of potential support. The stock could reach $60 within six months."

Both Bernie and Joe Sunderman consider Western Digital (WDC NYSE) a favorite, with a target of $15 in six months. In a special panel on technology investing, Joe says, "We look at technical trends, fundamental, and sentiment. The first stock that I have on my list is WDC, one of the largest hard disk drive makers. This selection is more fundamental than my other picks. The stock is very inexpensive. The price to earnings ratio is half of what the industry is and half of what the S&P 500 is. It's a very low valuation. Its price-to-sales ratio is less than one, which makes this a very appealing stock from that perspective. The company has exceeded Wall Street earnings estimates by an average of 72% over the last five quarters. Technically, the stock has been a relative strength leader, yet it doesn't get a following on Wall Street. To us, the stock is very appealing."

Here are Joe's other favorites, including two more long positions and two shorts:

"CheckFree (CKFR NASDAQ) is a provider of financial electronic products and services. This is another stock that has technically been very strong, and over the last five quarters it has exceeded expectations by an average of 43%. Along with that, despite beating earnings, 10 analysts out of 17 rate the stock a hold and two rate it a sell. So there is very pessimistic outlook on this stock on Wall Street. I think there is the potential for future upgrades."

"The most sentiment-based pick among these three long positions is Juniper Networks (JNPR NASDAQ). This is probably the most under-loved stock in the market. Only three brokerage houses recommend the stock as a buy-out of 31 recommendations. The company beat expectations in the last quarter and its got a high amount of short interest."

Joe also has two short recommendations. He says, "Oracle (ORCL NASDAQ), as everyone knows, is a leading provider of systems software. They were recently covered by Barron's as a bullish story on the cover, and investors are buying calls on the stock. I think it will be a laggard. Microsoft (MSFT NASDAQ) is another stock that everyone loves. In Barron's big money poll, many managers ranked it as their favorite. I also think this will be a relative strength leader." Meanwhile, Bernie has his own favorite short positions. His current top bearish picks are Tyco (TYC NYSE), with a downside target of $10 in six months, and Pfizer (PFE NYSE), with a downside target of $25 within three months.

Finally, here are Chris Johnson's current favorite long picks. One is P.F. Chang's, which is detailed above by Bernie Schaeffer. Here are the others:

"Silicon Laboratories (SLAB NASDAQ) manufactures and markets proprietary high-performance mixed-signal integrated circuits (ICs) for the wireless, wireline, and optical communications industries. Our upside target is $35."

"ADTRAN (ADTN NASDAQ) makes digital transmission products that improve the operation of building and using communications networks."

"Amazon (AMZN NASDAQ), the well-known online retailer, with an upside target of $40 a share."

"Finally, our last pick is a short sale recommendation - Transocean (RIG NYSE), an offshore drilling contractor.  We see downside risk to the $15 level."

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