Bernie's Best: Perfect 10s

07/22/2005 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

"I believe good things come in small packages, at least where investment opportunities in today's market are concerned," notes Bernie Schaeffer. Here, he turns his proprietary Scorecard Rating system to the universe of small-caps and finds two issues with perfect 10 ratings.

"I've been pounding the table on the small-cap Russell 2000 index in general. Here, I thought I'd look at some trees for the forest, honing in on the top-rated names (as ranked by Schaeffer's Equity Scorecard). In this light, medical equipment manufacturer SonoSite (SONO NASDAQ) and food service distributor Performance Food Group (PFGC NASDAQ) each earn perfect 10s on our rating system. Meanwhile, the core tenet of our expectational analysis strategy is that while technical strength is good, technical strength against a backdrop of skeptical (or even pessimistic) sentiment is better. These two stocks meet this criteria.

"As the #3 food service distribution company, Performance Food serves about 44,000 restaurants (including several fast-food and casual-dining chains), health-care facilities, and schools. For Performance, multiple signs of doubt from investors and Wall Street have earned the stock its winning rating. First, its put/call open interest ratio for options expiring within three months stands at 0.98, which ranks among the top 15% of all readings from the past year.

"Second, short interest is at its highest point since last September, as investors keep hoping to call an ultimate top on the shares. Roughly 6% of the stock's available float is sold on the short side and the short-interest ratio of more than 15 times PFGC's average daily volume provides a nice cushion of short-covering support. And on top of that, even the experts on Wall Street maintain three little-seen 'strong sell' ratings on the stock, along with three 'holds' and only a pair of 'buy' designations. The potential for short-covering, brokerage upgrades, or buying power from the options crowd hangs thick, further bolstering the equity's current pullback to technical support.

"Meanwhile, SonoSite manufactures miniature ultrasound devices popular in many branches of the medical field. The shares have been in rally mode since early 2003, more than tripling in value in 2-1/2 years. The equity is fresh from a retest of support at its ten-week moving average and is on a path to overtake its January high. Like PFGC, SONO shares are framed against a sentiment backdrop marked by a high open interest ratio and rising short-interest that now sits at a four-year high.

"Almost 9% of the stock's available float is sold short, and the short-interest ratio of 14.8 days to cover offers a likely scenario of short-covering support should the shares continue their ascent. While Wall Street analysts are pessimistic toward PFGC, they are rather oblivious to SONO. In fact, just two brokerages follow the stock, one who deems it a 'buy' and one who maintains a 'hold.' Additional initiations are likely to bode well for the security's price action."

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