A Contrarian Drive...

08/12/2005 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer looks for stocks showing strong technical performance while being out-of-favor in the media, on Wall Street, and among investors, particularly short sellers and options traders. Here, he suggests taking a "ride" with GM and Harley Davidson.

"Despite the rampant pessimism in the media lately, General Motors (GM NYSE) continues to be a solid technical performer. More than 80% of the brokerage firms following the automaker rate it a 'hold' or worse. Options speculators are also skeptical, as puts more than double calls in the front three months of options. Short sellers are also heavily bearish on the security, as it would take roughly eight days to cover the 68 million shares sold short at its average daily trading volume. What's more, these bearish bets represent more than 16% of the stock's total float, providing ample short-covering support.

"This wall of pessimism is contributing to GM's Schaeffer's Equity Scorecard rating of 9.0 out of 10. This type of negative sentiment often has bullish implications, particularly when the stock has not only succeeded in weathering the pessimistic storm, but has managed to rally. Indeed, the shares have rallied 46% off their April bottom. Overall, it's clear that the expectations surrounding GM was (and is) extremely skeptical. For options traders, we recommend buying the GM January 2007 40 call. For more sophisticated options traders, in our 'put selling portfolio' we suggest selling the bullish strategy of selling the GM September 32.50 put.

"Meanwhile, Harley Davidson (HDI NYSE) recently reported second-quarter earnings of 84 cents per share, topping the consensus estimate of 79 cents. Furthermore, the firm lifted its 2005 earnings growth forecast to 10%-13% from 5% to 8%. On the technical front, HDI has trended higher since April 20, setting a series of higher highs and higher lows while finding loose support at its ten-day and 20-day moving averages. The shares also regained their ten-week and 20-week trendlines for the first time since early March.

"Despite this fundamental and technical prowess, pessimism remains, as short interest accounts for 6.6% of the stock's float. What's more, it would take nearly eight days to cover the 18.7 million shares sold short, ample fuel for a short-covering rally. Finally, Zacks reports that 11 of the 14 analysts covering the stock currently rate the shares a 'hold' or worse. Any upgrades from this dour bunch could prove to be a boon for the security. For those familiar with options trading, we recommend buying the Harley Davidson January 2006 50 call."

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