Bernie's Best Bets

06/17/2005 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Using an extraordinary range of fundamental and technical tools, Bernie Schaeffer seeks the best-positioned bullish and bearish opportunities within any given market environment. Here, he offers a four-pack of ideas-two on the downside and two for upside gains.

"Among our bearish recommendations, we would point to two examples of 'faux blue chips'.Southwest Airlines (LUV NYSE) is certainly receiving amorous feelings from the investing public lately. Wall Street is flying the friendly skies, as nine of the 12 covering analysts rate the shares a 'buy' or better, leaving LUV subject to potentially damaging downgrades. Even the media is getting in on the act, as LUV was bullishly featured on the cover of a March edition of Fortune titled 'America's Most Admired Companies.' This type of optimistic media coverage often has bearish implications from our contrarian viewpoint. Technically speaking, for options traders, we suggest buying the Southwest January 2006 17.50 put.

"We are also bearish on Tyco International (TYC NYSE). The stock has found itself in some tough technical times as it resides below all of its short-, intermediate-, and long-term trendlines. While the stock hasn't wowed anyone with its technical prowess, calls still outnumber puts nearly three-to-one in the front three months of options. Additionally, TYC's short-interest ratio sits at a paltry 2.84 days to cover, limiting any short-covering potential. Even Wall Street is enamored, as eight of the 13 covering analysts rate the shares a 'buy' or better. This rampant optimism and TYC's technical struggles lead us to suggest buying the Tyco January 2006 35 put.

"On the other hand, we are bullish on homebuilders.Beazer Homes USA (BZH NYSAE) continues to be a stellar performer from both a fundamental and technical perspective. However, investors remain skeptical of the security. The stock's put/call open interest ratio rests at a whopping 3.53, which is higher than all but two daily readings of the past year. Also, the ten million BZH shares sold short account for 25% of the stock's float. An unwinding of these bearish bets could supply ample fuel to push the stock higher. Overall, we see the potential for further upside. Our recommendation for options investors is to buy the Beazer Home January 2006 50 call .

"KB Homes (KBH NYSE) has been on a tear recently, recently rocketing to a new all-time high. Despite the stock's technical performance, investors remain dubious, as short interest surged 11% higher during May. With more than 12% of its float sold short, KBH has ample short-interest fuel to stage a covering rally. The stock's put/call open interest ratio indicates that calls nearly double puts among near-term options and ranks above 98% of all readings taken in the past year. Such pessimism should keep the momentum 'building.' For more sophisticated options traders who understand put selling strategies (a bullish options play), we suggest selling the KB Homes June 65 put ."

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