Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
A Contrary Stand on Micron
07/11/2003 12:00 am EST
Chris Johnsonand Tom Reynolds are both analysts with Schaeffer Investment Research. In their analysis, they consider fundamentals, technicals, and sentiment. Both are also contrarians and use a proprietary system known as Expectational Analysis. They are bullish on Micron, in part because the investing community is overly pessimistic.
"Using our short interest filter, I searched for stocks that have outperformed the SPX over the past 100 trading days and that have both high short interest and short-interest ratios," says Chris Johnson. "One standout was Micron Technology (MU NYSE), a maker of semiconductor products. Over the past 100 trading days, MU has outpaced the SPX by 25% as the stock has gained nearly 80% off its February bottom. Despite the fact that the shares have performed well, short sellers have been active, adding more than 17 million shares in June, a 37% increase from May. According to our ‘Expectational Analysis' approach, this pessimistic activity signals potential strength in the stock as sideline buying potential remains strong."
Adds Tom Reynolds, "Micron has been strong since I first highlighted the bullish case for this stock on May 29, and the current sentiment picture could spell more gains. That's because many continue to bet against its strength. Short interest added 37% over the most recent reporting period, rocketing to a new all-time high of 63 million shares. It would take short sellers more than five days to cover these positions based on MU's average daily trading volume. That type of buying strength could result in another jaunt higher. The stock was recently featured in a major financial weekly, which cited its recent strength as a sign to take profits. This followed a previous story from April 7 that encouraged the same thing on the heels of a 9% gain in MU. Those who listened to this advice missed out on approximately 44% in profits. This article further illustrates the low expectations Wall Street has for MU – expectations that continue to be beat. Zacks reports that nine of the 16 analysts who cover the stock rate it a ‘hold’ and another rates it a ‘sell’. Future upgrades could bode well. Now for a concern: we could see resistance at 15, the site of peak call open interest in the July series. On the other hand, a move above this level could spark a final unraveling of all this pessimism–pushing MU to new heights."