Schaeffer's Favorites

08/15/2003 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman of Schaeffer's Investment Research, and managing quantitative analyst Chris Johnson , take an all-inclusive approach to investing. They assess a stock's technical and fundamental position and then apply a variety of sentiment-based studies, adding contrary analysis to their strategic arsenal. Here are the top picks of each advisor.

Bernie Schaeffer  picked three bullish favorites and two bearish choices. Among his bullish picks, he likes Ericcson (ERICY NASDAQ), the international telecom manufacturer;  Krispy Kreme (KKD NASDAQ), the operator of donut shops; and  Ford Motor (F NYSE). Here are some of Bernie's comments on these issues: 

"Despite the better-than-expected performance at Ericcson, options players view the shares with overwhelming pessimism. The number of shares sold short is more than four times its average daily trading volume, which would provide ample fuel for a covering rally. Zacks is showing heavy skepticism, with 14 of the 17 analysts rating ERICY a 'hold' or worse. Any upgrades could send the stock shooting higher.

"Krispy Kreme, the fried dough dynamo, has aggressive plans to expand its US market and explore opportunities overseas. Its monthly relative-strength measure vs. the S&P 500 Index is nothing short of phenomenal. Meanwhile, a healthy supply of pessimism exists from the options crowd. Wall Street analysts continue to ignore the stock, leaving plenty of room for upgrades or additional coverage that could boost it higher.

"Sentiment toward Ford remains grim, with short interest recently at the highest level of the past 10 years. Recently, a well-known business publication ran a cover story entitled 'Extinction of the Car Giants', which describes the troubles facing the American auto industry. Wall Street fails to see the stock as a comeback play. Only two analysts rate Ford a 'buy,' while seven rate it a 'hold' and four rate it a 'sell'. Future upgrades could bode well for the equity."

Among his bearish picks, Bernie opts for Freddie Mac (FRE NYSE), Tyco International (TYC NYSE):

"In recent months, Freddie Mac has become the latest culprit in the accounting scandal procession. The mortgage company reported major earnings revisions, fired its chief operating officer, and its chief financial officer has resigned. Additionally, the firm's chairman and CEO retired from his post. We also remain bearish on Tyco, the troubled conglomerate as investor optimism continues to dominate on this underperformer. Zacks reports that nine of the 10 analysts rate it a 'buy' or better. Future downgrades could spell trouble."

Chris Johnson,  managing quantitative analyst for Schaeffer Investment Research, says, "For once in a number of years, I am able to look at the economy as one coming out of a turning point. Many of the gauges we monitor suggest that money is starting to flow back into the market. We are now bullish on the both the short and the long term." Here are his top picks:

"Ebay (EBAY NASDAQ) has open interest at about 1.2--which is in the top 30% of pessimistic readings for the past year. Short interest is over 30 million shares. So even though we've seen considerable strength from Ebay and the company continues to beat earnings expectations, investors remain consistently pessimistic.

"The semiconductor sector is receiving the same kind of pessimism that we've seen with Ebay, such as high put-call ratios. What we are seeing now is that almost two puts are being bought for every call. Semiconductor HLDRs (SMH ASE) are also now showing high short interest; in fact, short interest is at an all-time record high for these securities. We've just seen a break above the 20-month moving average. We are bullish on these HLDRs due to the pessimism we are seeing build in the sector overall.

"Among individual semiconductor stocks we also like KLA-Tencor (KLAC NASDAQ. It currently has short interest of just under 18 million shares and a put-call ratio in the top 10% of its readings over the past year. So despite technical strength in the stock, we are seeing investors load up on puts.

"Ericcson (ERICY NASDAQ) has a put-call ratio of 1.25 - and that's within the top 20% of its readings over the past year. Among analysts covering the stock, we see 12 'holds'. So the majority of analysts are sitting on the sidelines. The stock also has high short interest.

"Our final pick is ADTRAN (ADTN NASDAQ). We have a put-call ratio in the 78% percentile. The company is showing continued strong performance and continues to beat earnings expectations. However, short interest ratio is high and analysts have turned their back on the stock."

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